A pickup in CMBS issuance is giving the market a much-needed liquidity boost, but underwriting standards are slipping as sponsors scramble to find enough collateral for deals, which are drawing investors looking for extra yields.
Just a few months ago, CMBS deals were relatively scarce—$11.6 billion of securities were issued last year, according to Trepp—and they had to be underwritten pretty conservatively to entice investors. Last week alone, two deals worth a combined $3.6 billion came to market, and market observers expect this year's issuance to total $35 billion to $50 billion.
Much of the collateral for these deals is expected to come from loans used as collateral in older deals that are maturing and need to be refinanced. But market participants say some of the best properties are being refinanced by insurance companies and international banks, which do not always resell their loans into bonds. Also, loans on some of the highest-quality multifamily properties are finding their way into the portfolios of Fannie Mae and Freddie Mac.
To compete with these other financing sources, Wall Street's CMBS conduits have to offer borrowers at least as much leverage as they could get elsewhere. "We're not back to '06-'07," in terms of underwriting criteria, said Julia Tcherkassova, a CMBS strategist at Barclays Capital, "but we're halfway there."
The latest transactions include junior, or B-note, tranches and many other features that characterized deals underwritten before the financial crisis. The collateral includes IO loans, loans on properties with mezzanine financing in place (or provisions allowing the borrowers to get such financing) and reserve accounts that are not fully funded when the deals close.
The first transaction to price this year, a $2.1 billion offering from Deutsche Bank and UBS, had a stated LTV ratio of 62.3%—a relatively mild increase from the sub-60% levels of last year's deals.
A $1.5 billion offering being marketed by Morgan Stanley and Bank of America Merrill Lynch has a Fitch stressed LTV ratio of 92.6%. (The stated LTV ratio is 61.6%.)
The bulk of demand for these deals is coming from CMBS investors "that just continue to see their portfolios mature and are looking to reinvest, whether its interest payments or principal payments, on a monthly basis, to try to hold the line on their current allocations," said Bill Bemis, a portfolio manager who oversees $3.5 billion of CMBS investments at Aviva Investors.
