Thought you folks might want to know this because, you know, it has been ignored by just about everyone.
Spreads on AAA-rated CMBS have narrowed by 100 to 150 basis points as a rally in these securities continues for the second straight month, particularly in five-year triple-A paper, according to a new report from Trepp. Predictably, the spreads have narrowed more on loans backed by stronger collateral, Trepp says. The narrowing has occurred even amid what the CMBS information provider calls "continued negative headlines."
Tom Fink, SVP at Trepp, tells GlobeSt.com that "the pricing is tightening up because people see that there’s an opportunity for doing a profitable trade by buying the bonds and then securing financing through the Federal Reserve’s TALF loan facility. That should provide a fairly stable underpinning for the five-year spread at least through the end of the year, which is how long the program is currently scheduled to last. If at the end of that, people start to see a good tone in the market and the performance of commercial real estate stops deteriorating, it could become permanent."
Still to come are deals on new CMBS through TALF, but Fink says "the market’s fully expecting that there will be new issue on the TALF program between now and the end of the year. You have a number of large institutions that have talked to the Fed and they expect to pursue deals with the Fed. There’s plenty of folks down in Washington who are suggesting that it be continued a lot longer."
Fink says he doesn’t expect the prospect of further actions by ratings agencies to discourage would-be buyers of CMBS paper. "The ratings agencies have taken their actions," he says. "Now it’s a matter of the agencies moving through whatever watch lists they’ve put out. So regarding the uncertainty caused by people asking ‘what are the rating agencies going to do?’ well, now they’ve already done it, and it’s priced into the market at this point."
At the same time, Trepp predicted that the delinquency rate on CMBS loans could double before 2009 is over. Given the decline in property values and drought of capital, "I don’t think it’s out of the question to predict that it could hit 6% to 7% by the end of the year"” says Fink.
Historically, he says, CMBS delinquency rates have lagged the economy by 12 to 18 months. "The Bureau of Economic Research said the recession started in the fourth quarter of 2007, and we saw delinquencies start to climb dramatically in the first quarter of ’09. We’ve got another nine months of rising delinquencies before that lag effect starts to work itself out."
However, this will not deter investors’ interest in the paper. "You’ve got plenty of research out there talking about which loans are going to go bad and what the losses will be," says Fink. "A lot of that information has already been absorbed by the market and is reflected in the prices."
Commercial real estate investment trust Simon Property Group (SPG.N) on Thursday added $500 million to its 6.75 percent senior notes due 2014, said IFR, a Thomson
The size of the deal was increased from an originally planned $250 million.
The total amount is now outstanding is $1.1 billion. Citigroup, Deutsche Bank, Goldman Sachs, and UBS were the joint bookrunning managers for the sale.
BORROWER: SIMON PROPERTY GROUP
AMT $500 MLN* COUPON 6.75 PCT MATURITY 5/15/2014
TYPE REOPENING ISS PRICE 105.029 FIRST PAY 11/15/2009
MOODY'S A3 YIELD 5.476 PCT SETTLEMENT 8/11/2009
S&P A-MINUS SPREAD 275 BPS PAY FREQ SEMI-ANNUAL
FITCH A-MINUS MORE THAN TREAS MAKE-WHOLE CALL 50 BPS
*TOTAL AMOUNT NOW OUTSTANDING $1.1 BILLION
What appears to be happening is we are going to have a classic flight to quality assets. We will, of course, see pictures scattered across the TV of strip malls going out of business because, well, there are just too damn many of them out there. We will also be inundated with constant reminder of how many "billions of CRE debt is now in default" but won't be told there are trillions of it out there (some perspective is needed). But what we will not see are the high quality regional malls going under. They will grow stronger as overall retail space declines and will then regain much of the pricing power recently lost.
Disclosure: No position