Monday’s Numbers: September 24, 2012

It’s Time for a Little Catching Up

Sales Trail: Transaction volume slowed for the 12-months ending June 30, as compared to the 12-month period ending March 31, declining about $15 billion on a sequential basis from $235 billion to $220.3 billion. Many causes come to mind, ranging from uncertainty regarding the path of the global economy to a dearth of quality offerings to the prices that sellers are demanding, to fear regarding the prospect of a “fiscal cliff” to, well, you get the idea. This is not to say that $220 billion is not a righteous number nor that the market is not likely to surpass last year’s total of $211 billion. They are; this is merely a warning that it is time to exercise care and caution.

CMBS Flourishes: Analysts and conduit management see issuance of commercial mortgage-backed securities reaching as much as $40 billion this year as borrowers try to take advantage of recent narrowing in spreads charged by securitized lenders. As we said last week, “It’s the yield” that’s driving capital into CMBS paper and lowering yields. In fact, the 10-year super-senior AAA-rated bonds in the most recent CMBS offering were priced 10 basis points narrower at Swaps plus 85 basis points that did a similarly rated tranche priced the week before. U.S. issuance, as of last Friday, equaled $29.3 billion as compared to $25.2 billion in 2011. Total U.S. issuance last year equaled $32.7 billion. Given the number of deals moving through the structuring pipeline, $40 billion seems achievable. Standard & Poor’s noted in the September 18^th issue of its “Structured Finance Research Update” a prediction of $45 billion of CMBS issuance in 2013, citing low long-term interest rates and tight spreads.

What’s an Insurance Company to Do? On the one hand, many insurance companies see CMBS spreads as too tight to be attractive and have decided to sit this out for a while, until risk-adjusted rates of return go back to what they believe are more normalized levels. We are not 100 percent sure what a normalized level is, but intuit that super-senior AAA-rated CMBS bonds priced at Swaps plus 85 basis points just does not do it. This is certainly true if your target is lending in the range of 200 basis points over 10-year Treasuries. One insurance company executive noted that he would rather take the risk involved in underwriting the entire physical asset than have the liquidity associated with the top portion of the financial asset.

And if not having anything to invest in werent’t enough of a problem, insurance companies are finding CMBS lenders becoming more competitive as the recent tightening in trading spreads is being translated into lower costs for the borrower. Interest rates on CMBS loans has declined to 4 percent to 4.25 percent, down as much as 50 basis points in the past two months, thereby bringing CMBS loans into competition with insurance company interest rate floors currently in the 3.5 percent to 4 percent range. If you combine this with the propensity of CMBS lenders to provide greater proceeds, you can see that CMBS lenders are becoming increasingly competive.

Monday’s Numbers

The Trepp, LLC survey showed commercial mortgage spreads coming in a few basis points during the survey period as securitized lenders reduce spreads to borrowers, reflecting the benefit of the recent rally in the most creditworthy CMBS bonds. Institutional lenders continue to utilize floor pricing in the sub-4 percent range, reflecting a more competitive lending environment.

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads showed spreads for 10-year, fixed rate mortgages, coming in five to 10 basis points.

Year-to-Date Public Equity Capital Markets

DJIA ⁽¹⁾: +11.15%
S & P 500 ^(2): +16.11%
NASDAQ ⁽³⁾: +22.06%
Russell 2000 ⁽⁴⁾:+15.48%
Morgan Stanley U.S. REIT ⁽⁵⁾:+13.81%

^{(1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index. (4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.}