Things generally have been looking better for commercial mortgage-backed securities, but those investing in the space should consider the nuances involved as well as the big picture.
For example, CMBS loan loss severity dipped below 40% for the first time since April in January, according to Trepp. Also the volume of CMBS conduit loans liquidated in January jumped to the third highest total since Trepp first began tracking this data back in January 2010.
“There's been improvement in multiple pockets of the market,” said Manus Clancy, senior managing director at Trepp. “We don't want to overemphasize this loss severity number too much, but it is part of a broader trend which is providing some sense of optimism in the market.
“We saw some other positive signs this month,” he said. “We saw tremendous spread tightening in January, so when you take that, along with the fact that loss severities dropped a little bit and special servicers resolved so many loans, you have an arc there which says things are looking better than they did three months ago.
“You're also seeing a pipeline develop of new issuance that people really didn't anticipate three months ago. They thought we really were in a stalled pattern,” Clancy added. “It is slowly but surely getting back to where it was last spring before the wheels came off over the summer.”
But how optimistic things look depend on what aspect of the market you look at, Clancy noted.
“I would say its cautious optimism on the new issue side,” he said. “I would say you could argue that the rally in the AJ sector in the secondary market bordered on frothiness. I mean the rally was so powerful in the middle of the month that it was defying gravity.”
However, the latter optimism is, of course, subject to the vagaries of the market, Clancy noted. “That could all go out the window with a lousy jobs report,” he noted.
As far as whether loss severity and the rate of liquidations will continue to improve, as Clancy often says, “One month doesn't really make a trend.”
But it fair to say, “It was a very active month for special servicers in terms of resolving loans. It means they are keeping their foot to the pedal to try to get this inventory of stuff cleared,” said Clancy. “That will be important throughout 2012 because we should see more and more loans going into special servicing, more loans becoming delinquent and the special servicers' plate will not be getting any less full.”
Being able to “continue to process these things efficiently and bring them to resolution will be important for the market to clear away this inventory of distressed assets,” said Clancy.
As far as whether the reduction in loss severity turns out to be a trend, he said, “We'd like to see that number which was 39% this month stay in that range for three or four months before we started to say we saw…firmer pricing. But we'll certainly take it, 39% is much better than the previous month and given how many loans we are talking about and how much volume there is it's a meaningful number.”
