The BSC Group

Market Alert July 28, 2011

CMBS 2.0 Takes a Blow – Borrower Beware

Market Factors

  • Bond Pool GSMS 2011 GC 4 was pulled from the market today due to S&P not being able to provide a final rating on the bond pool. The $1.5B offering from Goldman Sachs and Citigroup, which was set to close this week, was scrapped at the last minute as S&P indicates they are in the process of reviewing their methodology and criteria for rating commercial mortgage-backed securities.
  • Weak demand for bonds caused by the overhang of the debt ceiling debate in Washington and a lack of confidence in the global economy has resulted in a significant widening of spreads over the last three weeks.
  • Subordination levels below what investors are comfortable. GSMS 2011 GC4 saw its initial subordination level drop below 15%. Investors did not respond well to this. It is expected that investors will demand subordination levels between 20% and 30% going forward. This could potentially result in lower overall LTV and higher spreads on new loans.
  • The Market is dislocated. Several lenders have put a hold on quoting deals and we know of at least one lender that has invoked the MAC clause in their commitment letters to cancel all pending deals.
  • Heightened volatility in CMBS has caused CMBS loan originators to proceed with increased caution when quoting new loans, both from a pricing/hedging perspective as well as a perceived investor credit perspective

Implications for Borrowers

  • Spreads have widened significantly on CMBS mortgage loans along with CMBS bond spreads in recent months. According to our sources, current indications are breakeven levels around +295 for five-year loans and +240 for ten-year loans, which are about 100 basis points wider than levels seen just a few months ago. Anecdotally we are seeing current quotes on transactions less than $5M in the +325 range for 10 year deals; however, given the volatility in the market, spreads are changing daily.
  • More selective lending given the increased willingness of investors in CMBS 2.0 to walk away from transactions or demand changes to structure and/or pricing exerts pressure on lenders to turn out stronger transactions

CMBS Volume Update

  • Just over $20 billion in CMBS has hit the market year-to-date. Even given the recent volatility, experts are still projecting around $40 billion in new supply for full-year 2011, but acknowledge that projection could be overly optimistic if recent volatility does not subside.

Advisory Position

The BSC Group is advising clients to tread carefully if they have a transaction in the market; there is a high likelihood that deals will move around as lenders react to these recent developments. If you are looking to enter the market with a new transaction you may want to think about letting the dust settle before moving forward.

We will continue to provide updates to our valued clients as the story plays out.