CMBS Market in Eye of the Bondholder

MBA (6/23/2008 ) Murray, Michael
While some in the commercial mortgage-backed securitiesmarket see hope, CMBS investors just see just a long, dark tunnel.
Some analysts forecast a return to normalcy in the CMBS market anywhere from the end of this year; others as late as 2011. Most CMBS analysts forecast a return to market normalcy by mid-2009.

Rumors circulated last week—as spreads continued to tighten—that some CMBS shops were open for origination again. Informa Global Markets, New York, reported sources saying CMBS originations have begun again at certain major banks, but most shops appear on hold.

“Tighter spreads are the result of what is now the well-digested news that issuance for the balance of the year will be negligible, with very little if anything on tap for the balance of the summer, if not the year,” said Lisa Pendergast, head of CMBS strategy at RBS Greenwich Capital, Greenwich, Conn.

In last week’s CMBS Relative Value Weekly, Pendergast said 25 percent of attendees at the CMSA Conference earlier this month said that a bottom has been reached in the capital markets/CMBS sector, while 75 percent believe more volatility is in store.

Some investment analysts said they could not see anyone taking on CMBS risk at this time.

“Realistically, how could they? The mark-to-market issue has yet to be defined, commercial real estate fundamentals are continuing to deteriorate, the dollar is hardly a stable currency for foreign investors to bet on, the bond insurers are anything but stable—much less reputable—and when the securitization market does ‘come back,’ it will be nowhere near as aggressive as it was in the past four years,” said Clain Brandt, managing principal at BIHT Ltd. International, a sovereign wealth fund in the Channel Islands. “That industry will have to walk before it runs again, and even then probably be subject to serious regulatory oversight it didn't have previously.”

Brandt said it would take time for investors to gain confidence again in the CMBS market, based on the ratings agencies and insurance backing the bonds.

Moody's/REAL Commercial Property Price Indices (CPPI) on Thursday showed a 3 percent decline in commercial real estate prices in April from the previous year.

"April's drop was steeper than the 2.8 percent decline in March, which had been a record for the index," said Andrea Daniels, vice president at Moody’s Investors Services, New York.

Moody’s CPPI, however, still shows a 9.1 percent increase in prices in the last two years, and prices were up in New York by 12.2 percent, San Francisco by 11.7 percent and Washington D,C. by 10.8 percent compared to one year ago.

Similar to the CMBS time frame of mid-2009, more than 70 percent of CFOs responded that the U.S. economy would not begin to rebound until 2009, and 54 percent said the rebound would not occur until mid-2009 or later, based on a quarterly Duke University/CFO Magazine Global Business Outlook study.

The study said credit conditions directly hurt 35 percent of companies, through less credit availability and higher interest rates—up 118 basis points on average—and 60 percent of firms postponed expansion plans in response to the turbulent credit market.

High fuel costs, weak consumer demand, turmoil in the housing and credit markets and difficulty attracting and retaining high quality employees represented top concerns for CFOs, the study said.

It reported that nearly 60 percent of firms directly hurt by the credit crunch said credit is hard to find, and nearly half said their borrowing costs increased by 141 basis points on average. Among these same firms, nearly 60 percent said they would reduce investment or hiring in response to the adverse economic conditions.

The Duke/CFO Magazine survey also showed more than half of the CFO respondents were pessimistic about the U.S. economy while 21 percent were optimistic.

“For the last several quarters, CFOs reported bad news and more bad news. This quarter, we’re seeing bad news with a little bit of good news,” said Campbell Harvey, professor at Duke University and founding director of the CFO survey. “The bad news is that the credit crisis is devastating lower-rated firms. Eighty-two percent of these companies have been hurt directly by the credit crunch, with the cost of credit increasing by a staggering 331 basis points among firms rated B or lower.”

On a positive note, the level of optimism improved from an 8 to 1 margin last quarter to nearly 3 to 1 this quarter, “potentially indicating stabilization,” Harvey said.