CMBS market in ‘hiatus’ until Q3

Commercial mortgage-backed securities (CMBS) new issue will likely stay in hiatus for the next five to six months due to COVID-19's shuttering the commercial real-estate market (CRE) since March. The road back to new issue is rife will challenging steps. The major obstacles facing the industry are three-fold, according to industry experts: Cleaning up the $12-15 billion in warehouse loans to borrowers that planned on issuing CMBS first quarter. The U.S. big banks are 80% exposed to the warehouse facilities, bankers said.Investors need to find relative value in new issue CMBS vs. secondary markets that are flooded with cheap CRE assets.Term Asset-Backed Securities Loan Liquidity Facility (TALF) program needs a revision to help the CMBS market. TALF needs to go further than buying AAAs issued before March 23. If debts are paid, value is found, and TALF makes it happen – $40 billion in new issue CMBS is likely get issued before yearend with a re-start in October and end the full-year with US$50 billion total deals, including private-label, said Alan Todd, CMBS strategist at Bank of America Securities. The government is not helping the CMBS market with liquidity or new issue so it's very likely to come back down in price. Where has the money gone from the primary? Secondary trading has been a beneficiary as through March $60 billion in bids wanted in competition (BWICs) were offered with approximately 10% not trading for the first quarter. Bank of America recommends investors buy last cash flow (LCF) AAAs of conduit CMBS at this time. TALF 2.0 needs a makeover "TALF 2.0 hasn't made a dent in resurrecting the new issue market," said one hedge fund manager who declined to be named. The impact TALF 2.0 did have is convincing short CMBX holders to close a large CMBX BBB short position on April 10. "The CMBS market rallied the day TALF 2.0 was announced," the investor went on. "CMBX bid/ask was getting so volatile we exited our short of a large multi-million CMBS BBB trade short – but we wished we hadn't." He also added: "The government is not helping the CMBS market with liquidity or new issue so it's very likely to come back down in price." A sore point with CMBS bankers and investors is that TALF 2.0 buys AAA CLOs issued after March 23, 2020, supporting new issues in that sector. "We see a lot of lobbying in Washington D.C. to revise the current TALF 2.0 terms by trade groups for a duplicate of the original," said one CMBS attorney and partner at a global law firm. The CREFC and Mortgage Bankers Association and nearly a dozen other industry groups, published a joint letter March 23 with the following TALF 2.0 requests: TALF 2.0 should provide investors with non-recourse loans secured by new-issue and legacy mortgage-related securities, including but not limited to agency and private-label single-family and multifamily securities, private-label [CMBS], and specific types of high-grade credit risk, such as the GSE's credit risk transfer securities."A reinstatement and refinement of TALF1.0.Current terms of TALF 2.0 be expanded to increase the five-year maximum loan term for CMBS, reduce haircuts to a range of between 5% and 10%.Extend TALF 2.0 eligibility criteria to include super-senior AAA investment-grade rating from one or more of the nationally recognized statistical rating agencies. These senior bonds make up 70% of CMBS. What CMBS new issues will debut first? "We may see some single asset single borrower transactions, conceptually Amazon's warehouses could be securitized," said the CMBS lawyer.

CMBS market in ‘hiatus’ until Q3

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David Graubard

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