Analysts at Goldman Sachs Group Inc. say it's not too late to bet against commercial mortgage bonds, even if parts of the trade have become crowded this year.
Shorting portions of an index of commercial mortgage bonds known as the CMBX 7 still makes sense even after a growing number of investors have wagered against pieces of another index, the CMBX 6, analysts at Goldman Sachs wrote. Investors have been looking to bet against retail stores, which are getting clobbered by online competitors, and the CMBX 7 still has high exposure to malls even if the prior index has more, the analysts wrote.
The portion of the CMBX 7 index that's rated BBB- also trades at a higher price than its CMBX 6 equivalent, giving it more room to fall, and its loans include some risky credit features, such as more interest-only loans. Because the CMBX 7 index is a year younger, the window for loans to go bad is about a year longer, analysts led by Marty Young wrote in a note dated April 7.
"Altogether, we think CMBX 7 BBB- would be a better short opportunity than CMBX 6 BBB- at current spread levels," the analysts wrote.
The CMBX 7 index is backed by commercial mortgage bonds sold in 2013, while the CMBX 6 is backed by 2012 securities. In 2013, some investors argued that credit quality in the underwriting of new deals had meaningfully declined from the year before, and in at least once instance, they forced underwriters to withdraw a mortgage from a bond deal they had already sold. Investors had balked at the debt after learning that the property may have been over-appraised. The incident was flagged as an early sign of slipping standards in the more than $500 billion market.
Analysts at banks including Deutsche Bank recommended in February that investors short portions of both the CMBX 6 and 7. Investors have favored betting against the CMBX 6 index, which has 38% of its loans linked to retail, compared with 33% for the next index.
The delinquency rate for property loans bundled into bonds in general reached 5.37% in March, and has risen in 11 of the last 13 months, according to property research firm Trepp. Investors with short positions on the BBB- tranches in the CMBX 6 would have gained 6% in the first quarter on a total return basis, the Goldman analysts said earlier this month.
