Wednesday, August 17, 2011

CMBS Loss Forecast Raised as Property Lending ‘Reshaped’

From Bloomberg:

Losses on securities tied to commercial-property loans are poised to climb as lenders pull back, choking off funding to some borrowers with debt coming due, according to Deutsche Bank AG. Investors may face 9.36 percent in principal losses on commercial-mortgage bonds sold from 2005 through 2008, Deutsche Bank analysts said in a report yesterday, up from a forecast of 8.7 percent that the Frankfurt-based lender made in December.

“The environment for commercial real estate financing has been dramatically reshaped in the last few weeks,” said Harris Trifon, the head of commercial-mortgage debt strategy at Deutsche Bank in New York. “Capital is more scarce and acceptable leverage limits have decreased, which limits proceeds available to borrowers and restricts real estate values.”

Wall Street is ratcheting back originating new loans to package for sale as European debt crises and a slowing U.S. recovery roil markets, making it harder for banks to gauge how much cash they will recoup in bond sales and boosting rates for borrowers. When investors demand higher yields to buy the debt, lenders have to charge more to make deals profitable. Lenders have raised rates by about 100 basis points amid the turbulence, according to the Deutsche Bank report. While the increase has been offset by a rally in Treasuries for high- quality properties in large cities, financing spreads for lower- tier building are “significantly wider,” according to the report.

Bank of America Merrill Lynch cut its 2011 issuance forecast to between $25 billion and $30 billion, according to an Aug. 12 report. The bank had been predicting more than $40 billion in new sales. JPMorgan Chase & Co. reduced its forecast last month to between $30 billion and $35 billion from $45 billion.

‘Almost Non-Existent’
The pipeline for new deals in the fourth quarter appears to be “almost non-existent,” the Bank of America Merrill Lynch analysts led by Christopher Flanagan wrote. The safest commercial-mortgage backed securities are yielding 284 basis points, or 2.84 percentage points, more than Treasuries, according to a Barclays Plc index. The spread has jumped 75 basis points since the end of June, after sinking as low as 178 in April, the data show.

Prices on a Markit Group Ltd. CMBX index tied to junior AAA commercial-mortgage bonds plunged as much as 24.9 percent to 55.04 from the start of July through Aug. 8, implying losses of 15.3 percent on the underlying securities, according to Deutsche Bank. The index, which falls as the cost to protect against default rises, closed at 57.98 yesterday.

Loans originated in 2007 and coming due next year pose the greatest risk to investors in the near-term, according to Deutsche Bank. About 45 percent of those mortgages, taken out when property values peaked and underwriting standards bottomed, may struggle to refinance at maturity.

Wall Street has arranged more than $23 billion of commercial-mortgage bond sales in 2011, according to Bloomberg data. That compares with $11.5 billion in all of 2010. Sales plummeted in 2008 from a record $234 billion in 2007.