By Adam
Tempkin and Charles Williams
(Bloomberg)
--
Risk
retention for CMBS has turned out to be more of a "marketing hook"
than a feature that drives fundamental credit improvement in the securities,
Guggenheim portfolio managers Peter Van Gelderen, Shannon Erdmann,
and Simon Deery wrote in May 18 research note.
- CMBS retention structures
generally have the same credit quality as deals done prior to the rule in
2015 and 2016
- The clamor for risk assets and
yield have pushed historically conservative real money asset managers and
insurance companies into more subordinated and riskier CMBS investments,
compressing the spread differential between AAA and BBB tranches to
post-crisis tights
- There’s also been a higher risk
tolerance in short-tenor, floating-rate large loan and CRE CLO investment
alternatives
- In many cases these securities
are trading at a premium in the secondary market, despite being freely
callable
- The risk of these securities
being called and refinanced remains high, "and as a result we have
generally withdrawn from those secondary markets"
- Lower-quality tranches
outperformed during 1Q 2017
- In such a strong market,
Guggenheim is finding relative value in pre-retention deals
- "There are many with
similar or stronger credit metrics than their risk retention-compliant
counterparts, and those pre-risk retention transactions trade at
comparatively wider spreads and cheaper prices"
- Also remains active in
floating-rate large loan and CRE CLO transactions, but has limited
activity to primary markets
JPM Finds
Conduit Loan Quality Weaker
- Conduit CMBS underwriting
appears to be trending weaker despite retention, JPM analysts Gareth
Davies, Chong Sin and Suying Liu wrote in May 19
research report
- “While underwritten LTVs and
DSCRs for 2017 deals on average look similar to 2016 at 59% versus 60% and
1.96x versus 2.01x, respectively, rating agency stressed LTVs and DSCRs
show deterioration”
- Average Moody’s stressed LTV
for 2017 deals is 116% versus 113% last year and is also on par with the
average 2015 deal
- Some deterioration from
Moody’s can be attributed to increased office exposure in recent deals
- “Deal-to-deal office
concentrations have been highly variable at between 15% and 56% for an
average of ~41%, with nine of the 13 deals issued so far this year
containing office exposures of 35% or more”
- Also notable is a 9 percentage
point increase from 2016 in full-term interest-only (IO) loans, which
account for nearly 43% of loans in YTD conduits
- YTD full-term IO loan
concentration is second highest on record, only behind 2007 at 58%
- Is worth noting that
underwritten LTVs for full-term IOs are lower in recent vintages versus
pre-crisis
