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CRE Finance World, Autumn 2013

• As of August 1, 2013, there were only three Canadian CMBS loans in special servicing across all outstanding Canadian CMBS deals. The current delinquency rate for all deals is 0.27% according to the July 2013 DBRS Monthly North American CMBS Market Overview. By comparison, this report reveals the current U.S. CMBS delinquency rate is 8.55% — again over 30 times the current Canadian delinquency rate. Table 1, which follows, provides a comparison of Canadian and U.S. CMBS delinquency rates over the past year. Table 1 Canadian v. U.S. CMBS Delinquency Rates 2012–2013 Source: DBRS There are multiple reasons for the exceptional credit performance of Canadian CMBS, including strong (non proforma) loan underwriting, a conservative Canadian credit culture, smaller CMBS pools that are more manageable and transparent to investors, a high level of recourse loans in Canadian CMBS pools and lender-favourable Canadian bankruptcy and foreclosure rules. While a review of these factors is beyond the scope of this article, as discussed below the loan pools in the new Canadian CMBS deals compare very favorably to these legacy Canadian CMBS deals. Strong Relative Value and Lower Pricing Volatility Given its stellar credit performance, one would expect Canadian CMBS investment grade bonds to trade at spread levels that are very close to or even better than comparable U.S. CMBS spreads. As shown in Tables 2 and 3, this was true prior to the 2008–2009 financial crisis, however, the new recent vintage Canadian CMBS as shown on Table 4 have AAA and A bonds which have traded at a discount to U.S., i.e. giving investors not only stronger credit metrics but also a potential yield/spread pick-up. CRE Finance World Autumn 2013 22 Table 2 Canadian and U.S. CMBS AAA Spreads for Legacy Bonds Source: TD Securities; Trepp LLC As shown in Table 2: • Before the 2008–2009 financial crisis, Canadian CMBS AAA spreads generally traded at or slightly inside comparable U.S. AAA spreads, on a spread to government bond basis, of up to 15 bps for 5 year AAA’s and 19 bps for 10 year AAA’s. During the 2008–2009 financial crisis, U.S. CMBS bond spreads widened to levels significantly higher than Canadian CMBS spreads. However, in the past year Canadian AAA spreads have traded on par with or at a slight discount to comparable U.S. spreads. • When “stress tested” by the 2008–2009 financial crisis, Canadian CMBS AAA bond spreads were far less volatile (and held their value better) than U.S. AAA bond spreads — U.S. AAA spreads widened to over 1,000 basis points between January and April, 2009 while the increase in Canadian AAA spreads was only half of U.S. levels. • Canadian CMBS AAA bond spreads recovered far more quickly from the financial crisis than U.S. AAA spreads, normalizing almost 15 months earlier than U.S. CMBS spreads. A comparison of Canadian and U.S. AA, A and BBB CMBS bond spreads is even more dramatic: Canadian CMBS: “Low Hanging Fruit” For U.S. Fixed Income Investors


CRE Finance World, Autumn 2013
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