Commercial-Mortgage Index Jumps on BlackRock Estimate

A commercial property debt index soared after BlackRock projected losses on the securities won't be as severe as investors expected

(Bloomberg)—An index tied to commercial property debt soared to the highest level in more than two years after BlackRock Inc. projected losses on the securities won't be as severe as investors expected.

The price of a Markit Group Ltd. CMBX index linked to junior AAA commercial-mortgage bonds, many of which have had ratings cuts, increased as much as 1.75 percentage points to 77.46 yesterday. Credit-default swap contracts on the index, which rises as investor confidence improves, are trading at the highest level since September 2008, the data show.

The National Association of Insurance Commissioners published loss expectations on Nov. 1 for the securities, calculated by the New York-based asset manager. The regulator group hired BlackRock, the world's largest money manager, to assess more than 7,000 commercial-mortgage backed securities and determine how much cash insurers must hold to cushion against price declines.

"There was some concern that loss estimates would be substantially higher," said Howard Chin, a money manager at Guardian Life Insurance Company of America in New York. "This sets the tone for what sort of capital insurance companies have to hold."

Higher loss estimates may have forced insurance companies to sell commercial-mortgage bonds because of capital requirements, Bank of America Merrill Lynch analysts said in a report yesterday.

"The announcement of loss estimates in this range reduces the probability that insurance companies will be pushed to sell," the mortgage debt, the analysts led by Roger Lehman in New York said.

Pimco, BlackRock

BlackRock doesn't comment on client activity, said spokeswoman Lauren Trengrove.

Prices on swap contracts linked to deals sold from 2006 to 2008, when underwriting standards slipped posing the biggest risk of loss to investors, increased the most, according to Brian Lancaster, an analyst at Royal Bank of Scotland Group Plc in Stamford, Connecticut.

The Markit CMBX index has risen 37.8 percent this year, the data show.

The NAIC chose Pacific Investment Management Co., manager of the world's largest bond fund, to evaluate home-loan securities. Analysis from BlackRock and Pimco is being used in place of ratings from Moody's Investors Service and Standard & Poor's to determine capital requirements. Life insurance companies asked for relief last year from the regulator group after the capital required to protect against losses on mortgage investments soared.

Loss Estimates

The loss estimates are lower than those forecast by some Wall Street banks, according to a report yesterday from RBS.

Average losses range from between 9.9 percent to 12 percent, according to the NAIC release, compared with estimates that had generally been between 12 percent and 15 percent, the RBS analysts said.

Also, assumptions on how much real estate values will fall are not as severe as those being reported by other indexes, such as from Moody's, the RBS analysts said. In the most likely scenario, assigned a 55 percent probability, prices will fall 32 percent from peaks before reaching a bottom, according to the model distributed by the NAIC.

The Moody's/REAL Commercial Property Price Index shows that U.S. commercial property prices tumbled for a third straight month in August to the lowest level in eight years, and are down 45 percent from October 2007 peaks.

Late payments on commercial mortgages bundled and sold as bonds are at a record 8.24 percent, compared with 3.64 percent a year ago, according to Moody's.

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