Friday, December 17, 2010

Commercial Mortgage Backed Securities Surge Back

Bloomberg News

Goldman Deal Pushes CMBS Sales Past $11 Billion Mark

Dec. 16 (Bloomberg) -- Goldman Sachs Group Inc. and Citigroup Inc. sold $876.45 million of bonds linked to U.S. commercial real estate, pushing 2010 sales to $11.5 billion as strategists forecast next year’s offerings will quadruple.

Property owners are pushing banks to offer better loan terms as more lenders vie for a share of the $650 billion commercial-mortgage bond market. Between 20 and 25 institutions are seeking to originate loans they plan to package into securities, up from about five competitors a year ago, New York- based Standard & Poor’s said in a Dec. 2 report. Issuance plunged to $3.4 billion in 2009 from a record $234 billion in 2007 after the financial crisis froze credit markets.

“The CMBS lenders came back quickly, and borrowers are benefiting,” Greg Michaud, head of real estate finance at ING Investment Management Americas in Atlanta, said in a telephone interview. “Twelve months ago, borrowers were happy to get anything. Now they are really shopping around.”

Today’s sale, tied mostly to payments on shopping center and office-building loans, priced to yield 140 basis points more than the benchmark swap rate for a top-rated $376 million slice maturing in 9.84 years, according to a person familiar with it. The securities were initially marketed to yield between 130 and 135 basis points over swaps, said the person, who declined to be identified because terms aren’t public.

Michael DuVally, a spokesman at Goldman Sachs, and Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment.

Interest-Only Loans

The Goldman Sachs-Citigroup offering included a higher percentage of so-called interest-only debt than sales earlier this year, according to a Dec. 9 report from Fitch Ratings. Such loans are considered riskier than mortgages that require the landlord to pay down a portion of the principal. About 85.4 percent of the pool sold today pays principal during the life of the loans, compared with more than 90 percent of offerings earlier this year, Fitch said.

Today’s deal still marks a “material improvement” compared with those from the boom ended in 2007, according to Fitch. That year, as much as 87 percent of commercial mortgages packaged into bonds delayed principal payments for at least a portion of the life of the loan, according to Morgan Stanley.

Relaxing Underwriting

Underwriting standards are usually the first metric to loosen as lending rivalry increases, JPMorgan Chase & Co. analysts said in a Nov. 24 report that forecast CMBS issuance may reach $45 billion in 2011.

“The competition is healthy because it means you have more dollars chasing these loans,” said Roger Lehman, an analyst at BofA Merrill Lynch Global Research. “Financing is a key component of the recovery in commercial real estate. It’s not a cash market.”

U.S. commercial real estate values peaked in October 2007, when the Moody’s Real/Commercial Property Price Index touched 191.9. The measure bottomed at 105.4 in August, marking a 45 percent drop.

To contact the reporter on this story: Sarah Mulholland in New York at

To contact the editor responsible for this story: Alan Goldstein at