However there remains a long trail ahead as the $18 billion of issuance during the latest period compares with $22.1 billion of deal volume during the same period a year ago. So even though some 15 deals are in the forward pipeline, issuance for the full year will fall well below last year’s $95.1 billion of volume.
Issuance during the latest quarter perked up when spreads began a retreat that followed an extremely volatile first half. That period’s volatility made it tremendously difficult for lenders to profitably price their loans, forcing lenders to slow or shut down their origination machines. June saw only three deals totaling less than $1 billion price.
Basic economics will tell you that when supply declines, prices will increase, which is exactly what happened. With few fresh bonds available for sale and demand remaining relatively unchanged, prices for bonds increased. Bond price increases are reflected by declines in spreads.
The spread for benchmark CMBS, bonds with a 10-year life and the highest possible ratings, peaked in March at 170 basis points more than swaps. By the time June came around those same spreads were hovering in the 115 bps area. Limited supply pushed spreads lower and lower, dropping below 100 bps in early August.
Lenders that remained active in the market did well, as they were pricing loans based on wide bond spreads. As those spreads narrowed, they profited more than expected. Rialto Mortgage Finance reported that it generated a 5.54% profit margin from the $491 million of loans it securitized between June and August compared to its typical profit of 2-4% on its CMBS loan originations.
The tightening bond spreads prompted lenders to prime their lending machines again and September saw roughly $8 billion of CMBS issuance, the year’s biggest monthly tally. With 15 deals in the pipeline, bond spreads have widened. The benchmark bond classes of the last two transactions priced at a spread of over 115 bps higher than swaps. Some argue that the credit profile of the latest deals’ collateral loans is weaker than the deals that immediately preceded them. As lenders try to sell off the loans they’re holding before risk-retention rules kick in, raise concerns that credit characteristics of upcoming deals might also be weaker than what was seen in late August and early September.
JPMorgan Securities was the most active bookrunner during the third quarter, handling $3.9 billion of CMBS deals, or nearly 22% of the quarter’s total issuance. Wells Fargo Securities remains the top dog for the year so far. It’s managed $6.8 billion of deals, just more than 15% of the $44.8 billion of issuance this year through the end of September.
Given the size of the forward pipeline, it’s unlikely that issuance this year will top $65 billion. That would be a drop of more than 30% from last year, further shrinking the role played by CMBS in the commercial real estate market.
Authored by Orest Mandzy
Compliments of Trepp – a member of the EACCNY