Blink and you might have missed it — but the market for Commercial Mortgage-Backed Securities (CMBS) reopened about 15 months ago with three transactions.
But the deals, issued in late 2009, were not CMBS as we knew them pre-financial crisis. DDR 2009-DDR1, BALL 2009-FDG and JPMCC 2009-IWST were all backed by multiple commercial properties, but collateralised with a single loan. Bond classes averaged a paltry four, and deal sizes clustered around the small-ish $450m mark.
Fast forward to now — we’ve seen an additional 10 CMBS deals issued. These are multi-borrower deals, with an average of nine or 10 tranches. Average deal sizes have jumped too — to $769.3m (in 2010) and $1.67bn (so far this year). The number of loans, meanwhile, is hovering around 31 (2010) and 45 (2011).
We bring it up because Standard & Poor’s are looking at these relatively rapid developments in the ‘CMBS 2.0’ market in a new report. Here’s an extract:
While the average size of the last 10 CMBS transactions is well below the peaks reached within the 2007 vintage, when the average deal size was $3.19 billion, the issuance amounts significantly eclipsed the first three single-borrower CMBS 2.0 transactions. In terms of issuance amount, the 2004-2005 vintage transactions ($1.25 billion-$2.15 billion) are the most similar to the three transactions that priced this year, whereas last year’s average of about $769 million is closest to those issued in 1996, when deals labeled “conduit” in Trepp LLC’s database totaled about $625 million apiece.
At the most recent CRE Finance Council convention, we heard arguments for and against higher loan counts within transactions. On one hand, having a relatively low number of loans in a deal makes the collateral analysis far more manageable–it’s “easier to get your arms around the collateral.” However, many investors lamented that they miss the diversity in typical conduit/fusion transactions, such as those issued from 2001-2008, when the average number of loans ranged from 103-198. In fact, the top 10 loan concentration metric (the balance of the 10 largest loans in a deal divided by the total balance of the deal), which is popular among investors, averaged about 65% in the 2010-2011 vintages. In post-2002 issuances, however, the top 10 percentage typically ranged from the high-30% to the mid-40% area at issuance, highlighting reduced diversification among recent conduit/fusion deals.
Yeah, give us more valuation complexity! Or erm, diversification.
Meanwhile, leverage and debt coverage ratios are inching towards their pre-crisis poorness levels too. Standard & Poor’s says the 2009 deals and the first transaction of 2010 were characterised by “extremely low leverage and very strong debt service coverage ratios (DSCRs).” Not so, however, for their more recent brethren.
Loan-to-Value (LTV) ratios are up about 10 per cent, and those DSCRs have fallen from about 1.48 in the first 2009 deal, to 1.16 in the last 2011 deal.
To be fair about it, those 2009 deals were ultra-conservative. There was plenty of talk about impending commercial real estate disaster and the effects of the financial crisis were still being felt. But the ‘recovery’ in CMBS issuance is still striking.
Here’s a brief list of S&P’s reasons for recent developments:
1. More competition [to issue deals] …
2. Some evidence of aggressive appraisals/valuations …
3. Cash flow underwriting appears steady …
4. Cap rates appear to have come in a bit recently …
The title of the S&P report, incidentally, is:
15 Months Later… The Caution Flag Is Out For CMBS 2.0