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‘Investor’s Revenge’ Depresses CMBS Values, Deutsche Bank Says

Wall Street banks struggled to unload commercial-mortgage bonds last month as $10 billion in new deals swamped investors.

JPMorgan Chase & Co. last week issued securities ranked BBB-, the lowest investment-grade level, to yield 390 basis points more than the benchmark swap rate, according to data compiled by Bloomberg. Wells Fargo & Co. and Royal Bank of Scotland Group Plc sold similar notes paying 300 basis points more than swaps on Jan. 28, the data show. The trend reversed from the prior month when prices climbed as much as 15 percent.

“The weakness can be attributed to the glut of primary supply, investor apathy and the enormity of January’s rally,” Deutsche Bank AG analysts led by Harris Trifon said in a report last week. “February should be called ‘investor’s revenge.”’

Demand for bonds tied to skyscrapers, shopping malls and hotels is showing signs of buckling as sales surge to the highest in five years. JPMorgan Chase raised its 2013 CMBS issuance forecast to $70 billion from $45 billion as offerings in January and February exceeded expectations.

The recent sell-off has been a “healthy development” for the market, according to Deutsche Bank, allowing for a rebound in values as the first quarter draws to a close. Buyers have been drawn to commercial-mortgage backed securities as the Federal Reserve keeps interest rates close to zero into a fifth year, pushing investors toward riskier assets.

Looser Standards

The flood of deals is set to slow this month, according to Bank of America Corp. Waning demand for the riskier portions of new offerings may be due in part to concerns that underwriting standards are slipping, Bank of America analysts led by Alan Todd said in a March 1 report. The rise of so-called interest- only, or IO, loans is the most pronounced example of looser standards, the analysts said.

“The trend we remain most concerned about - the increased amount of IO loans in recent deals - shows few signs of abating,” the New York-based analysts said.

Interest-only mortgages delay principal payments for part or all of loans’ terms, making it harder to refinance a mortgage at maturity. This type of debt accounts for 49 percent of loans packaged into commercial-mortgage backed securities this year, up from 34 percent in 2012, according to Bank of America. In 2007, when sales peaked and underwriting standards bottomed, 88 percent of commercial mortgages contained in CMBS were interest- only, the data show.

CMBS sales are reviving after shutting down in 2008 when credit markets froze. A record $232 billion of the debt was issued in 2007, data show.

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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