JPMorgan CMBS Sale Offers Low Spreads, Borrower Lifeline: Credit Markets

JPMorgan Chase & Co. sold the largest offering of commercial mortgage-backed securities this year as Wall Street seeks to chip away at property debt financed before real estate values plummeted.

The top-ranked 10-year portion yields 150 basis points, or 1.5 percentage points, more than the benchmark swaps rate, according to a person familiar with the transaction. That compares with a spread of about 305 basis points on comparable bonds issued prior to 2008, when underwriting standards were more lenient, JPMorgan data show.

The market for bonds that bundle commercial property loans is reviving after shutting down two years ago during the financial crisis. JPMorgan’s $1.1 billion offering, the seventh sale this year, signals bank willingness to lend to stronger borrowers and investor confidence that landlords can meet monthly payments as the economy recovers, said James Grady of Deutsche Asset Management.

“The recent deals have been well received by investors,” said Grady, a managing director in New York at the firm, which has $240 billion in assets under management, including commercial-mortgage bonds. “Ten months ago, the comeback seemed highly unlikely.”

JPMorgan, based in New York, estimates $335 billion of property loans packaged into bonds will come due through 2015. Deutsche Bank AG plans to sell $856.6 million of bonds backed by commercial mortgages, a person familiar with the offering said today. The securities are tied to 42 loans secured by 63 properties, said the person, who declined to be identified because terms aren’t public.

Default Swaps Rise

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt fell 1 basis point to 171 basis points, down from 180 on Sept. 1, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Average yields were 3.389 percent, the lowest since June 2003.

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.6 cent to 98.75 cents on the dollar as of 2:47 p.m. in New York, according to index administrator Markit Group Ltd.

The index typically rises as investor confidence deteriorates and falls as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

$4.7 billion Sold

Banks have sold $4.7 billion of bonds backed by commercial mortgages this year, up from $3.4 billion last year, according to data compiled by Bloomberg. Sales tumbled 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007. Issuance may reach $35 billion in 2011, S&P said in a Sept. 30 report.

Goldman Sachs Group Inc. and Citigroup Inc. issued $788.5 million of the securities on Aug. 4. It was the most recent offering to pool loans from multiple borrowers and included new features to appease investors as banks attempt to revive the market. One of the key changes is giving buyers of the highest- rated portions control of who manages troubled loans, a right that has historically been held by investors who buy the riskiest slice.

Investors are showing confidence in property assets, with the Bloomberg Real Estate Investment Trust index showing a total return of 23.1 percent this year compared with 5.7 percent for the S&P 500 stock index.

Property Confidence

Three new reports this week showed signs the commercial real estate market may be beginning to recover.

While U.S office rents fell in the third quarter, the rate of decline was the slowest since the first three months of 2009. That suggests demand may be stabilizing even as vacancies hover at a 17-year high, property research firm Reis Inc. said.

Actual rents paid by office tenants dropped 3.6 percent from a year earlier to an average of $22.05 a square foot, Reis said. Prices were little changed from the previous three months’ $22.06 a square foot.

“The pace of deterioration has clearly slowed,” Ryan Severino, an economist at Reis, said in an Oct. 5 statement.

A day later the New York-based company reported that the nation’s apartment vacancies dropped for the first time in almost three years in the third quarter, signaling the trend of people moving in with family or friends might be abating.

The shopping center sector, which Reis research director Victor Calanog said lags behind improving economic indicators after a recession, recorded the vacancy rate climbing to 10.9 percent from 10.3 percent a year earlier. The rate was unchanged from the second quarter, when it reached the highest level since 1991.

Underwriting Standards

In the JPMorgan offering, 49 percent of the bond pool refinances debt contained in commercial-mortgage backed securities issued before credit markets seized, Barclays Capital analysts Julia Tcherkassova and Keerthi Raghavan wrote in a report last month.

While tighter underwriting standards and lower values mean many property owners who borrowed from 2005 to 2007 won’t qualify for loans banks are writing now, stronger landlords will be able to refinance, benefiting investors in the older bonds, Deutsche’s Grady said.

The bonds JPMorgan sold are tied to 30 loans secured by 47 properties, according to the person familiar with the transaction who declined to be identified because terms aren’t public. The offering consists of 67 percent retail properties, 15.1 percent in office loans and 10.3 percent industrial loans, the person familiar with that deal said. Arizona, Florida and California account for about 44 percent of the pool.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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