Banks are being given a tool to hedge their holdings of commercial mortgages in a development expected to boost issuance of related securities and help bring new money into the US property sector.
Markit is launching a new CMBS index, which lenders can trade to reduce the risk of holding loans while they wait to be packaged into commercial mortgage-backed securities.
The launch could unleash a wave of speculation on the commercial property market and the value of commercial mortgages since traders will be able to bet on the performance of recently issued CMBS.
The Markit CMBX Series 6 index went live on Friday, calculated from the costs of insuring against default on 25 of the latest CMBS issues. CMBS are securities created from pools of commercial mortgages. By selling on their loans, mortgage originators are freed up to lend again.
Investors have been clamouring for CMBS because of their relatively high yields but, despite a 35 per cent uptick last year, supply remains tight because older US CMBS are maturing.
Analysts say it could remove a bottleneck that has limited new supply since it could help originators reluctant to warehouse loans while they wait to be packaged into CMBS.
“To get back to a healthy cycle, you need an effective hedge,” said David Cook of Barclays. “Nobody will be willing to run a naked long warehousing position in case there are macroeconomic hiccups. This will be the first truly effective hedging tool for originators, post-crisis.”
A dearth of CMBS issuance forced Markit to suspend launches in its CMBX series after the fifth iteration in 2008 and it has loosened the criteria for inclusion in the new Series 6, potentially making the index more volatile.
The underlying CMBS pools need not contain as many mortgages, as many borrowers or as diverse a portfolio of properties that used to be demanded.
The value of the index will be fixed daily based on quotes submitted by 12 investment bank trading desks.
Speculators are already drilling down into the details of the 25 underlying securities, to examine how the index may trade, including into the exposure to big box retailers whose competitive difficulties threaten to hurt the value of some shopping centre mortgages.
Richard Hill, CMBS strategist at RBS, said the index could be used by originators hedging their exposure and by investors.
“We believe CMBX 6 may allow investors to more efficiently express their views of relative value across the CMBS capital structure,” he wrote in a note to clients.
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