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CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 23 Table 3 Canadian and U.S. CMBS AA, A and BBB Spreads for Legacy Bonds Source: TD Securities; Trepp LLC Not only did U.S. CMBS bond spreads in these investment grade classes increase to unprecedented levels during the financial crisis (U.S. BBB spreads topped out at 6,860 basis points in April 2009), the values of these U.S. investment grade bond classes have not recovered (and likely never will). By comparison, the widening of Canadian CMBS AA, A and BBB spreads was significantly less (on both an absolute and relative basis) and Canadian spreads have now largely recovered to normalized levels. Compared to U.S. CMBS, Canadian CMBS investment grade bonds have clearly demonstrated that they are significantly less volatile (and hold their value better) in a severe market disruption and recessionary environment. Part of this stronger performance might be attributed to a larger number of “buy and hold” investors due to the positive credit metrics of Canadian CMBS, resulting in fewer day to day traders and lower volatility. The longer term market perspective of Canadian CMBS investors, combined with these positive credit metrics of Canadian CMBS likely helped limit the market dislocation during the 2008-2009 financial crisis. Table 4 Canadian and U.S. New Issue CMBS Spreads Similar to the legacy CMBS bond spread comparison in Tables 2 and 3 (measured as the cost of risk over the government risk free rate), Table 4 shows that recent Canadian AAA new issue CMBS bonds are at a premium to U.S. AAA CMBS spreads of 18-26 bps recently. Furthermore, recent Canadian A rated new issue spreads were a 34 bp premium to the U.S. A rated bond spreads. AA and BBB bond spreads were generally flat with comparable current U.S. levels. Considering that the lion’s share of investment grade CMBS buyers invest in AAA CMBS, one would believe the credit metrics and potential of a spread pick up on Canadian AAA CMBS, particularly the 10 year bonds, to be compelling to investors. Key Credit Metrics of New Canadian CMBS Loan Pools As shown in Table 5, the new CMBS Canadian loan pools compare favorably to the legacy Canadian pools in key CMBS credit metrics: Table 5 Comparison of Key Credit Metrics: New Canadian Issues v. Legacy Deals 1. Includes IMSCI 2012–2, IMSCI 2013–3 and CCMOT 1 2012–1. Based on these credit metrics, the underwriting of these new Canadian CMBS loan pools appears across the board to be more conservative than the most recent legacy Canadian CMBS loan pools (the 2006-2007 vintage “Newer Legacy” deals) that have performed so well and on par with the “Older Legacy” Canadian CMBS loans (1997-2005 vintage). The new issue Canadian CMBS loan pools have significantly lower Cut-Off and Maturity Date LTVs, higher NCF DSCR and shorter amortization than the Newer Legacy CMBS. When compared with the Older Legacy CMBS, new Canadian CMBS deals fare well with significantly higher recourse, comparable NCF DSCRs and, while amortization is a bit longer, Maturity Date LTVs are comparable to Older Legacy CMBS due to the lower initial Cut-Off Date LTVs in New CMBS. Finally, we note IO loans have never been an established feature of Canadian CMBS and are not expected to be going forward. In the new Canadian CMBS deals there were only 2 interest only loans, both in the CCMOT 1 2012-1 pool, and both of which were made to a single investment grade-rated Canadian REIT with Canadian CMBS: “Low Hanging Fruit” For U.S. Fixed Income Investors


CRE Finance World, Autumn 2013
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