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CRE Finance World, Winter 2012

CREFC Issuers Forum Update — 2011: A CMBS Rebuilding Year Jonathan Strain Managing Director J.P. Morgan Chair, CREFC Issuers Forum 2 strong CMBS issuance volumes fostering energetic new market volatility and uncertain on cmbs execution spreads. Aslines. The uncertainty of market clearing prices combined with thedifficulty in hedging their trading positions, resulted in the surpriseclosure of several loan origination platforms. New loan originationvolumes and velocity slowed dramatically with the increase in011 has been an adrenaline filled year for CMBS issuerswith increased loan originations weighed against increasedcompetition, increased volatility and increased externalpressures. The first half of 2011 was characterized by competition for borrowers’ loan business. Origination spreads investors began a flight to quality assets, US Treasuries continued began declining at the January CREFC conference open panel and to rally as the market began to shun riskier asset classes. The excited CMBS professionals worked to decrease borrowers’ coupons so called “risk-off” trade brought an end of the AAA investor’s with record low US Treasury yields. The loan market started to feel preference for increased information availability over the liquidity solid underfoot and brokers and borrowers finally felt the CRE of public markets. In late July, investors demanded the return of recovery was underway. Research estimates began to grow toward the Super Senior AAA bond in a public format and created what $50Bn in issuance for 2011 and the excitement of CMBS 2.0 some market participants are calling CMBS 3.0. The increased spread to many of the players who had been on the sidelines in demand from public investors assures us that public conduit AAAs 2010. Given the shortage of real estate acquisitions closing and are here to stay. the relatively small amount of vintage 2001 and 2006 CMBS loans maturing, it was actually a little depressing to see how fast Behind the scenes, issuers worked together with their peers to originator competition had swung the pendulum back to a “borrowers provide feedback and thoughtful responses to CREFC on the market” in less than six months. Several dealers began to look at Dodd Frank regulatory proposals as well as other new efforts to floating rate loans to diversify their product offerings and make reshape the securitization business like the universally criticized loans where other lenders were not. Portfolio lenders also began Premium Cash Capture Reserve Account or PCCRA. Retention of chasing the increasingly scarce product and began doing bigger risk and the definition of a Qualified CRE Mortgage were important deals and secondary market deals in order to meet their origination issues that could radically impact the ability of issuers to continue targets. Banks were active in the major markets including some to originate for sale in the future. The regulators are just now new entrants from Asia. Life companies began a record run with finishing the review of the those comment letters and decisions a pace well beyond the prior years’ production in spite of low made over the next several months will have a profound impact on absolute coupons. Mortgages looked cheap to other fixed income the future of the CMBS business. Additionally, issuers are trying investments like US Treasuries and corporate bonds. to understand the impact of new rating agencies like Morningstar and Kroll and the relative importance of ratings under new bank The second half of 2011 has been a markedly different environment. guidelines and changing investor preferences. The use of three The summer remained very busy for most loan platforms although ratings has been more common as new combinations are tried originator and borrower negotiations became increasingly anxious. and no one has yet gone with a single agency. 17g5 rules and the Credit metrics like LTV and debt yield were starting to max out. increased wariness of rating agencies has decreased the dialogue Rating Agencies and Bpiece investors began to differentiate with issuers dramatically and unpredictable rating agency outcomes between pools with dramatically different results for issuers. Loan are a new risk factor for issuers to be wary of. kick outs and bnotes were being negotiated to improve pools investment profiles and no credit was being given for shadow rated The year seems to be ending shy of the ambitious plans that many loans despite the obviously lower risk profiles. Additionally, the Irish market participants had predicted before the first quarter of 2011. banks launched a sale of their billions in US loans which created However, the CMBS investor base still has a lot of capital for the need for acquisition financing and other banks were watching transactions that meet their increasingly complex criteria and this anxiously as they too were weighing a sale of loans into the improved bodes well for issuers entering the new year given the extremely market for loan sellers. There was a tremendous amount of work light pipeline for the first quarter. 2012 should be another year of being done by investment banks and originators to increase capacity growth albeit with the backdrop of a still tenuous European fiscal and differentiate their businesses. But with a looming US budget crisis, a presidential election year and a large wall of 2007 five year stalemate and European sovereign debt default concerns, there was balloon maturities. CMBS issuers are glad to be back in business danger lurking across numerous fronts. August brought dramatic and people are embracing the challenges. But it would serve us all credit spread volatility to CMBX derivatives and cash CMBS followed. well to be prudent and rebuild a good foundation for the increasing Real money investors began to rethink their investment strategies volumes of refinancing that will sneak up on us over the next few years. and a new sense of fear sent the fast money investors to the side- CRE Finance World Winter 2012 74


CRE Finance World, Winter 2012
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