Page 19

CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 17 Given the fact that, the servicer from the prior securitization had announced its intent to re-engage with the Perkin’s borrower, I think it was the right thing for the dealers to pull the loan. Prior to knowing that that servicer was re-engaging with the borrower, the fact that investors were able to know that the loan had been in a different pool, it was DPO, and there was a difference in the appraisal from then to now, was enough in my mind to understand that deal and decide whether I could buy whatever bond I might be interested in with that loan in the pool. Brian Lancaster: CMBS spreads are generally wider over 2013. Do you think the market seems to be recalibrating spreads for worse quality collateral in addition to the tuning the rating agencies are doing with higher credit enhancement levels? Are investors pushing back? Are they more discerning between deals than they were pre-crash? John Mulligan: Yes, I would agree with that. Brian Lancaster: Then let’s talk about performance. How has 2.0/3.0 performed in 2013 versus other sectors? John Mulligan: It has been all over the lot. If you look at 5-year and 10-year AAA 3.0 CMBS, the spread range has been 57 and 55 BPS respectively from wides-to-tights. Versus where we were in December of last year, depending on what deal you look at that’s currently pricing, ten year paper is 10-15 wider, and the 5-year product is 45-50 wider. There isn’t really a direct comp in corporates for AAA, but a lot of people kind of look at single A corporates as maybe roughly equivalent. I’d say that product is either flat to someone tighter over the course of the year, and certainly didn’t have the amplitude of spread swings that CMBS had. Brian Lancaster: If CMBS has been under-performing corporates, is it more of a technical, credit issue or something else? We’ve seen a big increase in issuance. Is issuance growing faster than the investor base? Are investors demanding wider spreads for greater risk? Or is it something else? What is your take John? John Mulligan: I have my take and it’s just speculation, and Jon should chime in since he sees the order books. But from my perspective, I don’t think it is so much of the credit quality, and I don’t think it is so much of the volume. By historical standards, the deal sizes and volume sizes aren’t huge, and the credit quality is somewhere short of the worst by a good stretch I think. To me, the biggest difference is really the risk tolerance and the secondary positioning by the street. This is a business where the street is a principal and their book if full of whole loans as well as bonds. It is easier to tamp down the secondary inventory where PNLs are generally lower, and you can do it more quickly by selling inventory, so I think it is the risk tolerance of the street and the size of the secondary positions that is a noticeable difference. Whether that is a small part or big part of the overall performance, I don’t know. I don’t know what the tally of investors is, whether that is down dramatically or flat, or up, but Jon will have to help us with that. Jon Strain: I think the street’s balance sheet is much smaller than it was, even through 2004 and 2005, but I actually have not done an analysis of it. There are half as many banks because so many of them merged, so there are fewer market makers. Each of those market makers has smaller offering sheets, and I just think it’s a different world. There used to be so much leverage in the system, and the street would routinely have $2 and $3 billion offering sheets where they would actually have a front sheet that they were offering and then they’d have a back sheet where they had bonds that they weren’t ready to sell yet, or they didn’t want to put their full inventory out there. I think the street was much longer, but it was much more levered. As bank cost of capital has gone up, as prop trading has been eliminated by the Volcker Rule, all those things have taken away from the street’s risk appetite. The street still has to take risks to makes loans because there is really no other way for CMBS to be created. Borrowers can’t organize themselves to close on the same date 12 times year for people to issue that way, so someone is taking that risk. There are a lot of specialty finance companies, like Ladder, Rialto, Redwood and JLC to name a few, who are making and selling loans through the process. But I think the street is definitely at a different point than at the peak. Richard Walsh: It’s just a small market onto itself. Where are the outstandings, $600 billion? Brian Lancaster: More or less. My experience is that some firms have been shifting their money making from trading, particularly in lower rated bonds to originations, in part because of risk and capital charges. Profits are made primarily at the investment banking level not at the trading level. Traders are becoming more market maker for firm deals as opposed to proprietary trading as in the past all of which can impact spreads. Jon, thoughts on Basel III and capital requirements for CMBS? Jon Strain: I think people have concentrated liquidity in their balance sheets in AAA product. I think people have remarked that there is less liquidity is in legacy mezzanine bonds that have been downgraded. A lot of that is just because the risk capital that you need to hold against a BB, or not- rated security is very high relative to its actual size. I think that has tempered it. People who have invested in those sectors find there is a lot less liquidity there. AAA investors may find enough liquidity, or they may not like the market or the bid-ask but there is some liquidity for sure. CRE Finance World Roundtable Discussion: 2014 Outlook


CRE Finance World, Winter 2014
To see the actual publication please follow the link above