JPMorgan Cuts Commercial-Mortgage Bond Forecast as Volatility Hurts Profit
JPMorgan Chase & Co. (JPM) cut its 2011 forecast for sales of bonds tied to commercial mortgages by as much as $15 billion as volatile prices curb profitability for Wall Street banks, impeding a recovery in the property market.
JPMorgan reduced its forecast to between $30 billion and $35 billion, the New York-based lender said in a July 22 report. It had projected in November as much as $45 billion in new offerings for this year.
Securities tied to property loans have declined as Europe’s fiscal crisis and a stalemate between U.S. lawmakers over raising the debt ceiling roil markets. Banks sold $3 billion in commercial-mortgage backed bonds last week at the highest yields this year, according to data compiled by Bloomberg.
“It has gotten harder to make money in the new issue market,” according to JPMorgan analysts led by Ed Reardon.
Underwriters accumulate loans over several months to pool for sale as securities. A drop in values before the debt is sold means banks won’t receive as much cash as anticipated when the loans were made. Jumps in spreads may cause lenders to pull back as it’s difficult to protect against price swings, UBS AG analysts said in a July 21 report.
Goldman Sachs Group Inc. and Citigroup Inc. boosted spreads on BBB bonds by 200 basis points to 700 basis points more than benchmark swap rates on a $1.5 billion offering sold last week, according to people familiar with the sales, who declined to be identified because terms aren’t public.
Similar debt rated BBB-, the lowest investment-grade ranking, was sold to yield 295 basis points, or 2.95 percentage points, over the benchmark in February.
Trimming Deals
Banks have already begun to trim deals, with one offering in the pipeline cut to $1.5 billion from $2.3 billion, according to JPMorgan. Wall Street has arranged about $21.6 billion of commercial-mortgage bond sales this year, compared with $11.5 billion in all of 2010, Bloomberg data show.
The pull-back could impede a recovery in commercial real estate prices, particularly for properties that aren’t in the large, coastal cities where insurance companies are focused. Financial institutions like insurers that hold mortgages on their books have been snapping up lending assignments on the best properties, leaving Wall Street to lend more in smaller cities on less stable properties, according to the UBS analysts.
“The revival of the CMBS market has been a component of the stabilization,” of commercial real estate prices, the UBS analysts led by Ross Nussbaum said. “A pullback from this capital source would be a real concern as real estate values sit at the intersection of cash flows,” and the cost and availability of financing.
Maturing Loans
Sales of commercial-mortgage bonds peaked at $234 billion in 2007, helping fuel a boom in property prices, Bloomberg data show. Issuance plummeted to $12.2 billion in 2008 as souring subprime-home loans infected credit markets. The market stayed shut until November 2009, choking off funding to borrowers with debt coming due.
Concern that a wave of maturing loans could derail an economic recovery prompted the Federal Reserve to include commercial-mortgage bonds in its Term Asset-Backed Securities Loan Facility, or TALF, one of the programs started to jumpstart credit markets in the wake of the collapse of Lehman Brother Holdings Inc. in September 2008.
About $158 billion commercial mortgages packaged into bonds will need to be refinanced through 2014, according to Citigroup data.
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
More News:
- U.S. ·
- Bonds ·
- Real Estate
Rate this Page