By Todd McNeil
In an effort to reignite the CMBS Securitization market and broaden the buying pool of investors, CMBS issuers have returned to public bond offerings. Most, if not all, of the latest CMBS issues have come to market with public offerings.
This trend began when Goldman Sachs and Citigroup were forced to pull a CMBS offering from the market during August 2011. When the transaction returned to the securitization markets it included a restructured, larger publicly-offered deal in order to produce a more effective way to attract investors.
A year ago the CMBS market was roaring out of the gates with tightening spreads, increased loan-to-values, more distressed-loan resolutions, and delinquency levels were flattening out. However, in summer 2011 most of those positive trends took a turn for the worse. CMBS spreads began to widen. Standard and Poor’s (S&P) announced that it would pull their rating of Goldman Sachs and Citibank’s upcoming securitization. This event forced Goldman and Citi to repackage the issue. In doing so, the Goldman / Citi offering created a new level of bonds to broaden the pool of buyers, thus creating CMBS 3.0. Issuers are now offering extra credit enhancement to the highest level of bond holders in the new structure. Several other CMBS issuers followed suit after Goldman and Citibank. The result has been both good and bad. The good news… the demand for the highest-rated bonds was strong. The bad news…the demand for the lower-rated bonds is not as strong. In other words, the B-Piece Buyer is still the critical element driving the CMBS market, and those buyers are limited.
All this shuffling has led borrowers looking for a CMBS or an insurance company loan to find a bifurcated market.
Clearly, insurance companies, agency lenders (i.e. FNMA) and private book lenders such as pension funds can provide lower pricing on a commercial real estate loan versus a CMBS lender. For example, in today’s market, Life Company pricing will range from 4% to 4.5%, versus CMBS 5% to 5.75%…about a 100 to 175 basis point premium.
The recent shuffling has caused CMBS spreads to widen, making a clear demarcation between CMBS versus Insurance Company, FNMA and Pension Funds. The widening spreads were needed to ensure that the CMBS origination shops were able to attract the bond buyers needed to securitize the issues. The silver lining is that CMBS is still a solid product that most likely can offer a borrower superior leverage. There is still a huge place in the market for CMBS product, and it is a welcome sight coming off of a 2009 / 2010 where almost zero fixed rates lending was coming from Wall Street.
There are now two classes of borrowers, the Haves and Have Nots. Obviously, to the extent one can access pension fund or insurance capital, why would you go to CMBS? The answer is, CMBS can clearly offer most borrowers a higher loan-to-value and, CMBS will consider secondary and tertiary markets. As mounds of maturing debt comes due on properties where valuation may very well be the “jump ball,” most assuredly the lending sector that can deliver higher leverage may very well turn into “Lender de Jour.”
Long term, Moody’s Investors Service says structured finance transactions such as CMBS deals will perform better than pre-crisis CMBS pools as a result of improvements in asset quality and transaction structures, both of which were responses to weaknesses revealed during the crisis.
CMBS Issuance is on track to produce over $40 billion of volume, according to a late April Issue of Commercial Mortgage Alert. For now, the CMBS loan market is steady and a somewhat predictable platform (with respect to pricing and leverage) that will have a much-needed impact on the upcoming wave of maturities. Before long, pricing will align itself with the insurance companies and pension funds. Leverage will creep up as market fundamentals continue to stabilize and the thirst for long-term paper increases.
Navigating the waters of CMBS players can be a confusing and time-consuming task. Today, there are about 20 to 25 active CMBS players who are all not necessarily looking for the same thing with respect to product type, leverage or even borrower / sponsors for that matter. Some CMBS providers prefer lower-leverage deals with top quality sponsors and, in return, are offering very competitive pricing. Other CMBS players will move up the leverage curve (and even offer mezzanine financing). However, expect pricing to be risk-adjusted. Whatever the financing requirements, Metropolitan Capital Advisors has the capabilities and deep-rooted relationships to access the full spectrum of available CMBS capital to best maximize your objectives.