CMBS era of issuance grinds to halt in January

NEW YORK (Reuters) - The credit crunch could see the commercial mortgage-backed securities market passing an ominous milestone -- the first month in its two-decade history without a single issue priced.

None of the $37 billion in issues slated for the first quarter has priced, including Blackstone Group's BX.N $10 billion deal backed by Hilton Hotels and bonds assembled by dealers such as Goldman Sachs Group Inc GS.N. Their absence bodes poorly for the buyout boom that depended on the market for cheap financing, analysts and investors said.

The commercial mortgage-backed security (CMBS) market has been rocked by the fallout of the mortgage crisis as investors reduce risk appetites for all assets. The market in 2008 has faltered further, pushing yield premiums to record levels, saddling issuers with loan inventories and preventing them from making many new loans.

“If you originated loans in 2007, chances are now you are facing a wider spread environment and it may not make sense economically” to issue bonds, said Alan Todd, head of CMBS research at JPMorgan Chase & Co., a top underwriter. “Also, new originations have been slow” because lenders have not been making new fixed-rate loans, he said.

No demand for floating-rate deals also hurt issuance, said Darrell Wheeler, head of CMBS research at Citigroup Inc.

January appears to be the first month without issuance under the current market format, or since the Resolution Trust Corp stopped issuing CMBS in 1995, he said.

Dealers sold a record $233.7 billion of U.S. CMBS in 2007, up 14 percent from 2006 even as volume began to dry up at midyear, according to Credit Suisse. Issuance first exceeded $100 billion in 2005 as the bonds became popular funding tools for leveraged buyouts.

Hopes for issuance in 2008 turned bleak as gyrations in global markets sent risk premiums soaring.

Yields on the safest benchmark 10-year CMBS have blown out by 65 basis points to 145 basis points over interest rate swaps since December, according to JPMorgan. The premium was less than 30 basis points in the first quarter of 2007 when dealers sold more than $62 billion in the bonds.

The 10-year spread reached an intraday high of 175 basis points on January 23 after an emergency Federal Reserve interest rate cut failed to soothe U.S. markets following a global asset sell-off, according to RBS Greenwich Capital. Investors also tried to sell more than $1 billion in existing CMBS, it said.

“For banks, the intraday volatility in spread is just too much to swallow,” Brad Messinger, head of capital markets at Zenta, a New York-based company which helps dealers price and sell bonds, said in a Friday interview.

CMBS had also been a key funding source for the buyout boom that peaked last year -- but since the credit crunch lenders have grown wary of buyout-related CMBS, citing concerns over leverage, pricing and a lack of diversity since they are often concentrated on a single sector with unique risks.

Should they be unable to syndicate the debt on favorable terms, underwriters may be forced to take write-downs or make price concessions.

Price volatility in financial markets and expectations that delinquencies on properties from office buildings to hotels will rise has kept investors at arm’s length, having watched the implosion in residential mortgage debt. This has sent Wall Street dealers far and wide to drum up new investors, including trips to Asia and Eastern Europe, Zenta’s Messinger said.

The logjam will break when hedge funds that have been raising cash decide asset prices have fallen to attractive levels, he said. There is no consensus as to when hedge funds will start buying, Messinger added.

“All the dealers are trying to figure out what to do” to resume lending, Chris Lau said in a Monday trading commentary for RBS Greenwich Capital. Some may forgo issuance for the entire quarter and transfer loans off balance sheets to third-party funds, he said.

Additional reporting by Jonathan Keehner; Editing by Jonathan Oatis