Rally in CMBS Buoyed as Angelo Gordon Leads Investors: Mortgages
Bondholder confidence is growing that U.S. commercial property is bottoming following the recovery in residential housing.
Angelo Gordon & Co., LibreMax Capital LLC, Metacapital Management LLC and Brevan Howard Asset Management LLP are among firms that snapped up commercial mortgage-backed securities as some of the riskiest debt jumped as much as 13 percent in July to 68 cents on the dollar.
Demand for bonds linked to offices, skyscrapers and shopping malls is the highest in four years as commercial properties in the largest cities across the U.S. show signs of improvement. Late payments on mortgages bundled into securities fell last month for the first time this year and property values have climbed as much as 41 percent from their January 2010 low. Funds are piling in as Federal Reserve efforts to reduce borrowing costs, revive housing and stimulate the economy fuel demand for higher-yielding debt.
“The rally is just beginning and it’s still cheap so people aren’t being shy,” said Anthony Barkan, a principal at investment firm Seer Capital Management LP in New York, which oversees about $900 million. “The fundamentals are really good. Revenues are up in all sectors over the last year.”
Seer Capital, run by former Deutsche Bank AG executives Phil Weingord and Richard D’Albert, has been investing in CMBS since the firm started managing money in 2009.
Investors added holdings even as Europe’s leaders grappled with the sovereign debt crisis and slowing U.S. economic growth. The Fed said yesterday it will ease policy further if necessary as unemployment persisted at 8.2 percent.
Angelo Gordon, the $24 billion firm started by John Angelo and Michael Gordon, is planning a new residential and commercial mortgage fund, according to a presentation, a copy of which was obtained by Bloomberg News.
“After several years of continued declines in housing and commercial real estate pricing, Angelo Gordon is now cautiously optimistic that a nascent recovery is beginning in these markets,” the New York-based firm said in the July 26 presentation. It manages several funds and separate accounts that already invest in commercial and residential mortgage securities, the firm said in the presentation.
LibreMax, the $1.7 billion investment firm co-founded by former Deutsche Bank trader Greg Lippmann, has been increasing CMBS holdings this year, according to letters sent to investors. Holdings had increased to 12.7 percent of its assets at the end of June. The hedge fund said in February that it started the investments following the hiring of Michael McLarney, previously of Barclays Plc.
Lippmann, who gained fame for his wagers at Deutsche Bank against subprime mortgage securities before the housing market collapsed, has also bet on the $1.1 trillion market for U.S. home loan bonds without government backing.
Gains on subprime-mortgage bonds issued from 2005 through 2007, the years that produced the most defaults leading to the worst financial crisis since the Great Depression, have rallied more than 25 percent this year, according to Barclays index data. Returns accelerated amid signs the residential property market is beginning to climb back from the worst collapse since the Great Depression.
Home prices in 20 cities fell 0.7 percent in May from a year earlier, the smallest 12-month decline since September 2010, according to the S&P/Case-Shiller index. Prices increased 0.9 percent from April when adjusted for seasonal variations.
Metacapital, started by former Lehman Brothers Holdings Inc. trader Deepak Narula in 2001, has been “positively disposed to CMBS,” the investment firm wrote in a July 31 letter. The approximately $1.1 billion fund has been focusing on deals from 1998 to 2004, which were originally underwritten to lower values. It also sees value in certain 2006 and 2007 securities that may yield between 8 percent to 15 percent “even in stress case scenarios.”
The firm hired Tadeusz Jachowicz as a CMBS portfolio manager, formerly of FrontPoint Partners LLC, according to the letter.
Brevan, the $36 billion investment firm, started a fund in May to invest in all types of CMBS. It raised money from the Pennsylvania Public School Employees’ Retirement System to buy bonds created during the property boom leading up to 2007, Bloomberg reported in June.
“Most people are on board the bullish train, at least for now,” said Harris Trifon, a Deutsche Bank analyst in New York. “The interest rate market is reset so low that its forced fixed-income investors to look for higher-yielding assets.”
Interest jumped this year as the Federal Reserve Bank of New York auctioned off commercial property debt it assumed during the 2008 bailout of American International Group Inc. (AIG) The sales from the Fed’s Maiden Lane programs helped the district bank recoup loans extended during the rescue.
“The Maiden Lane successful sale process is probably the most important with respect to market confidence,” said Chris Skardon, partner at $250 million Charlotte, North Carolina-based Gorelick Brothers Capital LLC. “If you feel like we’re getting close to the bottom, then it’s a reasonable time to enter back into the market,” said Skardon, whose firm is a dedicated fund of mortgage hedge funds invested in about 20 managers, including those in CMBS.
Though late payments on the debt fell in July, they rose to records this year as loans from the boom era failed to refinance, according to Wells Fargo & Co. (WFC) Delinquencies declined 11 basis points to 9.34 percent last month, marking the first decline since January.
Property values are also staging an uneven recovery, with buildings in the largest cities recovering 41 percent from January 2010, compared with an 18.7 percent gain for those in smaller cities, according to the Moody’s/RCA Commercial Property Price indexes.
Slowing economic growth and the ongoing European debt crisis may knock the rally off course, according to Deutsche Bank’s Trifon.
“There is the potential for a bad ending in the very near future,” he said.
For now, demand for newly created bonds is also rising, helping Wall Street arrange loans for landlords needing to refinance. Wells Fargo and Royal Bank of Scotland Group Plc (RBS) last month issued top-ranked securities maturing in about 10 years yielding 120 basis points more than the benchmark swap rate, the narrowest spread since April, according to Deutsche Bank data.
Relative yields on top-ranked commercial mortgage bonds narrowed 24 basis points last month to 162 basis points, or 1.62 percentage points, according to Barclays index data. The spread is the least since at least January 2008.
“The fundamentals of CMBS should hold up even if we have a weakening economy and a downtick in GDP as long as we stay out of recession,” said Barkan of Seer.