UBS AG (UBSN), the investment bank that’s eliminating 10,000 jobs as it retreats from fixed-income, isn’t giving up on the $550 billion commercial-mortgage bond market.
Switzerland’s largest bank is teaming with mortgage-bond pioneer Lewis Ranieri’s Situs to reduce headcount by shifting 30 of its bankers to the consulting firm where they are originating and underwriting commercial mortgages, said Ken Cohen, the New York-based head of the CMBS group at UBS. The lender will continue to trade and issue securities linked to everything from strip malls to skyscrapers.
The Zurich-based bank’s commitment highlights the profitability of bundling property loans into bonds as buyers scour the fixed-income landscape for higher-yielding investments amid Federal Reserve efforts to stimulate growth by holding interest rates at record lows. Issuance of the debt surged to the highest in almost five years in September as investor confidence grew the commercial property market is recovering.
“The CMBS market has seen a tremendous resurgence in the past few months,” said Scott Singer, a principal at the Singer & Bassuk Organization LLC, a real-estate firm that represents property owners and developers arranging financing. “Late night e-mails and weekend conversations with CMBS lenders have become the norm again. A switch was turned back on and it’s driven by demand in the bond buying marketplace.”
UBS teamed with Barclays Plc to win a $1.6 billion lending assignment to General Growth Properties Inc. (GGP) last month, beating out Wall Street rivals including Deutsche Bank AG, Morgan Stanley, JPMorgan Chase & Co. and Wells Fargo & Co. (WFC) The group at UBS ranked fourth in underwriting the deals in the first half of 2012, up from fifth in 2011, according to the Commercial Mortgage Alert, an industry newsletter.
Even as some debt markets experience record issuance, UBS plans to eliminate about 10,000 jobs as Chief Executive Officer Sergio Ermotti, 52, shrinks its investment bank under pressure from Swiss regulators to boost capital. The lender is retreating from capital-intensive investment-banking businesses such as fixed-income trading to rely more on its wealth management unit, the world’s second largest, to boost returns for shareholders.
For UBS, maintaining CMBS is important to keeping an edge in its money management business.
“The CMBS business dovetails beautifully with the wealth management division,” Cohen said in a telephone interview. “The wealth management clientele tend to be the ultra high-net worth folks, and are likely to have some exposure to commercial real estate in their investments.”
About 10 people are currently in the process of moving from UBS to Situs, completing the bank’s plan to move most of its CMBS originators and underwriters to the Houston-based firm, Cohen said. The transition is unrelated to the job cuts announced last month, he said.
“We embarked on this months ago,” he said. “It’s just a more efficient way to do business.”
Situs, which provides commercial real estate consulting services like due diligence on properties and underwriting to clients including Wall Street banks. Ranieri is chairman, according to the company’s website.
Ranieri, 65, a pioneer of loan securitization, started in the mailroom at Salomon Brothers when he was 19 and built a career as a trader and leader of the firm’s mortgage-bond department through the 1980s. His efforts were chronicled in “Liar’s Poker,” the 1989 book about bond traders by Michael Lewis.
His firms’ other commercial real-estate investments include Ranieri Real Estate Partners, Ranieri Real Estate Advisors, a debt and equity broker, and Berkeley Point Capital, which provides funds for multifamily buildings, according to its website.
Steven Powel, the president of Situs, declined to comment on client business.
UBS rose 0.8 percent today in Zurich to 14.53 Swiss francs. It has advanced 11 percent since before the Oct. 30 announcement, extending its gains this year to 31 percent.
The investment bank will keep its advisory business, as well as equities, foreign exchange and precious metals, and will maintain some capabilities in rates and credit. About 2,000, or 28 percent, of about 7,200 front-office staffers will be cut at the division globally, and total reductions at the unit will be “north of 5,000,” Ermotti said on an Oct. 30 conference call.
Sales of commercial-mortgage bonds are surging as yield-starved investors wager on a recovery in commercial property after values rose 41.5 percent since bottoming in January 2010, according to Moody’s Investors Service.
Wall Street has arranged about $33 billion in sales of the debt this year, compared with $28 billion in 2011, according to data compiled by Bloomberg. Issuance, though down from a record $232 billion in 2007, is forecast to reach $45 billion this year, according to Credit Suisse Group AG.
The extra yield investors demand to own top-ranked CMBS rather than Treasuries has fallen to 1.11 percentage points from 2.47 percentage points on Jan. 3 and is down from the peak of 15.07 percentage points in November 2008, according to the Barclays CMBS Aaa Super Duper index.
Rising sales are a boon for borrowers with loans coming due as lenders compete to offer landlords the best terms. UBS can leverage its relationships with property owners to boost business, Cohen said.
“If somebody owns a shopping center, our ability to provide that wealth management client with a financing source is a great tie-in,” Cohen said.