Maiden Lane Redux Joins With Europe to Roil CMBS
A $7.49 billion mass of real-estate debt assumed by the Federal Reserve Bank of New York in 2008 is weighing on the commercial-mortgage bond market, exacerbating a slide in values as Europe’s debt crisis flares and doubts mount about the strength of the U.S. economy.
Relative yields on securities tied to shopping malls, skyscrapers and hotels have climbed to 206 basis points as of April 10, a six-week high, from a more than four-year low reached March 27, according to a Barclays Plc index. The 29 basis-point widening compares with a 17 basis-point rise in a Bank of America Merrill Lynch corporate bond index.
Investors are concerned that a sale from the New York Fed’s Maiden Lane III LLC may overwhelm the market in a decline reminiscent of auctions from the district bank last year. The turmoil comes as Europe’s fiscal imbalances threaten anew to infect the financial system and as the Fed fails to commit to a third round of quantitative easing even as the improvement in U.S. unemployment falters.
The initial sell-off “was a knee-jerk reaction” to a Fed sale, said Lisa Pendergast, a commercial-mortgage debt strategist at Jefferies Group Inc. in Stamford, Connecticut. “The Fed learned their lesson with Maiden Lane II. The potential inability to contain the euro zone debt crisis, the sustainability of the U.S. economic recovery, and whether we see QE3 any time soon are the real culprits.”
The New York Fed said last week that it’s considering selling assets in its Maiden Lane III portfolio. The holdings, taken on in the bailout of American International Group Inc., include two collateralized debt obligations, or CDOs, with a face amount of $7.49 billion that are tied to commercial property loans issued by Deutsche Bank AG in 2007 and 2008.
Deutsche Bank, Barclays Plc and Credit Suisse Group AG are preparing bids for the assets, according to people familiar with the potential sale. Goldman Sachs Group Inc. has also approached investors about preparing a bid, said other people, who declined to be identified because the process isn’t public.
Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk fell for a second day. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, dropped by 5.2 basis points to a mid-price of 96.8 basis points as of 1:36 p.m. in New York, according to Markit Group Ltd.
Rate Swap Spreads
The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 105 basis points on April 10, the highest level since January. Credit-default 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.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, declined 1.51 basis points to 28 basis points as of 1:43 p.m. in New York. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded U.S. corporate securities by dealers, with 73 trades of $1 million or more as of 1:43 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Commercial Mortgage Bonds
Investors in the $600 billion commercial-mortgage bond market are waiting to see if two transactions in Maiden Lane III, which bundle securities culled from 103 deals, will be sold intact or broken down into pieces, according to a report dated April 9 from Jefferies’s Pendergast.
The New York Fed said in a statement last week that it will only conduct a transaction that “represents good value, is done competitively and is not market disruptive.”
Renee Calabro, a spokeswoman for Deutsche Bank, Brandon Ashcraft of Barclays, Steven Vames of Credit Suisse and Michael DuVally of Goldman Sachs, all in New York, declined to comment on bid preparations.
Commercial real estate CDOs have been the “most opaque and most complicated” segment of the market, and have been “embalmed” for the past four years, Deutsche Bank analysts led by Harris Trifon wrote in a report yesterday. The securities may be plotting a comeback, according to the New York-based analysts.
CDOs repackage assets such as bonds or loans into classes of varying risks and returns.
Underscoring tensions in the market, commercial mortgage securities have lost 0.75 percent this month, while corporate debt from the riskiest to the most creditworthy has gained 0.52 percent, Bank of America Merrill Lynch index data show.
Europe’s fiscal crisis is getting worse and will keep fueling market instability, according to Pimco’s Mohamed A. El- Erian.
“The problems in Europe are getting bigger,” El-Erian, co-chief investment officer of the Newport Beach, California- based firm, said yesterday on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “Europe has a debt issue and Europe has a growth issue, and until Europe deals with both, we are going to have these reoccurring periods of nervousness in the market.”
In the U.S., hiring trailed forecasts in March, casting doubt on the vigor of the more than two-year-old economic expansion. The 120,000 increase in payrolls was the smallest in five months and less than the most pessimistic estimate in a Bloomberg News survey of economists. The unemployment rate fell to 8.2 percent from 8.3 percent as people left the labor force.
Maiden Lane II
The New York Fed halted regular and more public auctions of mortgage securities held by Maiden Lane II LLC, a separate vehicle, last year after traders blamed the sales for damaging prices in credit markets with the cost of protecting against losses on subprime housing debt and commercial mortgages soaring.
The bank ultimately completed selling the entire portfolio this year after opting to hold auctions with a more limited number of dealers in response to unsolicited bids for assets.
After selling the last group of bonds in the Maiden Lane II pool in February, the New York Fed said that taxpayers earned $2.8 billion on their $19.5 billion loan to that vehicle.
Commercial-mortgage bond sales have been reviving, with banks arranging about $28 billion of the securities last year, up from $11.5 billion in 2010, according to data compiled by Bloomberg. More than $4 billion has been sold this year, compared with a record $232.5 billion in 2007.
JPMorgan Chase & Co. is marketing about $1.1 billion of bonds backed by commercial mortgages in the bank’s first sale of the debt in 2012, according to a person familiar with the offering. The deal is linked to 49 loans on 118 properties across the U.S., with properties in Texas accounting for more than 20 percent of the pool, said the person.
Turbulence in the commercial-mortgage bond market makes it harder for Wall Street banks to gauge profit from future bond sales, hindering new lending and choking off funding to borrowers with loans coming due.
“Recent spread widening, if sustained, will moderately lower CMBS issuance,” S&P analysts led by Howard Esaki in New York wrote in a note yesterday.
The rating company will lower its 2012 issuance forecast of $35 billion to $30 billion if spreads stay in the current range, the analysts said. Bank projections for commercial-mortgage bond deals in 2012 range from Wells Fargo & Co.’s $25 billion to Credit Suisse Group AG’s projection of as much as $45 billion.
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