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CMBS Underwriting Standards Slip as Sales Surge, Index Shows

Underwriting standards in the U.S. commercial-mortgage bond market slipped as sales surged last year, according to investors trading the latest version of an index linked to the debt.

Markit Group Ltd.’s CMBX derivative index linked to debt issued last year with a BBB- rating, the lowest investment-grade ranking, closed at 378.4 basis points on its first day of trading yesterday, according to Credit Suisse Group AG. That compares with 335.4 basis points for similar securities sold in 2012. A wider spread means it’s more expensive to purchase insurance.

“It was a little wider than I thought it was going to be,” Harris Trifon, a debt analyst at Deutsche Bank AG, said in a telephone interview yesterday. A sell-off in stocks that started last week “exacerbated things a little bit. The closing price on day one isn’t the best indicator of where the basis is going to settle,” he said, referring to the difference between where the two indexes trade. A larger gap reflects a greater divergence in the perceived riskiness of the underlying securities.

Concern is mounting that underwriting standards are slipping as competition between lenders intensifies amid surging issuance. Sales of bonds tied to commercial-property loans doubled to $80 billion last year, and are poised to reach $100 billion this year, according to data compiled by Bloomberg.

The latest index is a boon for Wall Street banks that need a way to protect themselves from price swings on the debt while they accumulate loans to package for sale as securities, which can take several months.

“We expect deal size to grow this year,” Michael Kreicher, a commercial-mortgage bond trader at Morgan Stanley said on a panel at an industry conference in Miami earlier this month. “CMBX has made dealers more comfortable growing their lending business, allowing originators to feel confident building their pipelines with more flexibility to manage the credit risk on their books.”

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