CMBS Sales Poised to Rise 50% in 2013, Deutsche Bank Says

Issuance of bonds tied to commercial mortgages is poised to climb 50% in 2013 as investors chase riskier assets, aiding property owners with maturing debt, according to Deutsche Bank AG.

Sales of securities linked to shopping malls, hotels and office building may reach $60 billion next year, up from a projected $40 billion by the end of 2012, Deutsche Bank AG analysts led by Harris Trifon said in a report today. About $38 billion of the debt has been issued to date, the New York-based analysts said.

Wall Street banks are accelerating the pace of commercial-mortgage origination to satisfy investor demand for the bonds with the Federal Reserve anticipating it will hold interest rates close to zero through mid-2015. Lenders will probably come to market more frequently or boost the size of offerings to clear their books quickly, the analysts said.

“The less time it takes issuers to aggregate loans and distribute bonds the sooner they can do it again,” they said.

The fourth quarter will likely mark the fifth consecutive increase in sales of the bonds, providing a boon to borrowers with maturing debt, according to Deutsche Bank. Lenders are offering $2.58 billion of the debt this week.

Barclays and UBS AG are marketing a $1.46 billion transaction, with the top-ranked portion maturing in 10 years expected to pay a spread of 95 basis points more than the benchmark swap rate, the same as similar debt sold by Wells Fargo & Co. and Royal Bank of Scotland Group last week, according to people familiar with the offering who asked not to be identified because terms aren’t public. Deutsche Bank and Cantor Fitzgerald LP have teamed up to sell a $1.13 billion deal, the people said.
Underwriting standards, which bottomed as sales peaked at $232 billion in 2007, have “mostly held firm,” according to Deutsche Bank.

“This is probably not the majority view but we believe there is strong evidence to support it,” the analysts said.

The amount of so-called credit enhancement on current deals is higher than during the bubble years to make up for looser standards, the analysts said. Additionally, the number of loans that include junior debt has declined, the analysts said. Such debt allows a borrower to incur greater leverage against a property, making it a riskier investment.

If originators get too competitive and issuance surges past $60 billion, the quality of loans will suffer in 2013, according to Deutsche Bank. Investors may pull back in the second half of next year if lenders become more aggressive, the analysts said.

“Exploding issuance volumes could prove to be too much of a good thing,” they said.

Top-ranked bonds linked to commercial mortgages are yielding 1.07 percentage points more than Treasuries, according to a Barclays index. The spread reached 1.01 percentage points on Oct. 24, the narrowest since at least January 2008, and has declined from this year’s high of 2.47 on Jan. 3.