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September 18, 2012 7:47 pm
Issuance of commercial mortgage-backed securities, touted as the asset of choice for investors driven out of the residential mortgage market by the Federal Reserve, is expected to ramp up next year, but still may not keep pace with demand, analysts say.
Standard & Poor’s, the rating agency, predicted on Tuesday that US lenders would issue $45bn of CMBS in 2013, up from an estimated $40bn this year.
The increase is not expected to be enough to replenish the supply of CMBS, which has been shrinking at a rate of more than $3bn per month, according to S&P. Issuance next year will only be 20 per cent of the total issued in the US in 2007, the peak of the securitisation boom.
Some of the roadblocks to a big jump in issuance include uncertainty over regulation under the Dodd-Frank Wall Street reform act, which mandates issuers of CMBS keep a portion of the risk on their books, and volatility in financial markets which is discouraging banks from warehousing commercial mortgages for packaging into securities.
“You don’t want to be caught holding a tonne of loans on your books if spreads blow out, which is why banks are unwilling to create a pipeline capable of churning out CMBS deals on a regular basis,” said Keerthi Raghavan, CMBS strategist at Barclays. “The issuance numbers we are talking about are still not very large. Supply is not going to overwhelm demand by any stretch of the imagination.”
Issuance could improve if there is regulatory clarity and with the launch of a planned new CMBS index that banks could use as a hedging tool, Mr Raghavan said.
CMBS has emerged as a favourite of conservative investors seeking modestly higher yields since the Federal Reserve’s programmes of quantitative easing pushed down yields first on US Treasuries and, with the announcement of a new, unlimited “QE3” last week, on residential mortgage-backed securities.
The resulting scrabble for CMBS has pushed prices higher and driven yields to historic lows. The Barclays CMBS index on Monday posted a record low yield of 2.2 per cent, a record low spread over Treasuries of 151 basis points and a record low spread over swaps of 1.67 basis points.
S&P’s 2013 forecast is based on an analysis of historic links between CMBS issuance and spreads. Howard Esaki, S&P’s global head of structured finance research, said that demand had so far not been damped by anecdotal evidence of weaker underwriting standards or by evidence that the recovery in commercial real estate prices had slowed, though these could become a concern.
“We are not any more at the bottom of the cycle,” he said, “and historically when issuance grows, underwriting standards tend to weaken, and we have seen a little of that already.”
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