Friday, July 19, 2019

CMBS Issuance Surprise: 26% Hike in 2017

By Orest Mandzy
February 12, 2018

Commercial Mortgage-Backed Securities
Risk Retention

(Orest Mandzy is Managing Director of Commercial Real Estate Direct, Philadelphia, which offers market intelligence on mortgages, equity raising, investment sales and commercial mortgage-backed securities.)

The domestic private-label commercial mortgage-backed securities market rebounded handsomely last year--issuance climbed 26 percent from a lackluster 2016 to 122 deals totaling $86.4 billion.

OrestMandzyGoldman Sachs contributed an industry-leading $11.7 billion of commercial mortgages to the sector last year, earning it the top post among CMBS bookrunners. The investment bank handled bookrunner duties on $11.8 billion in deals, nearly 14 percent of the year's issuance. JPMorgan Securities ranked second among bookrunners, handling $11 billion of deals, or 12.7 percent of the year's issuance. Citigroup ranked third with $10 billion of activity, or 11.6 percent of the total.

In a ranking of loan contributors, Goldman was followed by JPMorgan Chase Bank, which contributed $10.1 billion, or 11.8 percent of the year's volume, and Deutsche Bank, with $9.7 billion of loan contributions, or 11.3 percent of the total.

Goldman's share of the CMBS loan market increased by 22 percent from 2016; it was the sole loan contributor and bookrunner on four conduit deals that totaled $4.1 billion. It also contributed $7.6 billion of loans to a total of 22 single-borrower transactions. In eight of those deals, it was the only loan contributor and bookrunner.

Last year's CMBS issuance was healthy despite risk-retention rules, which many feared would stymie transaction volume. The main concern: that the market would struggle to wrap its arms around the new rules, which require issuers to retain a 5 percent vertical piece of every securitization or sell a 5 percent subordinate piece by market value to a B-piece buyer.

The rules, which went into effect in December 2016, led to a sharp slowdown in issuance early last year. Lenders simply were unsure how to profitably price loans, as it was unclear how buyers of horizontal risk pieces would price those tranches.

But that period of price discovery was relatively short-lived. The year's first conduit, a $1.3 billion deal led by Citigroup and Deutsche Bank, was structured with both vertical and horizontal risk-retention pieces, with the latter being acquired by KKR & Co. The deal priced favorably--its benchmark class, with the highest possible ratings and a 10-year average life--printed at a spread of 90 basis points more than swaps. That was some 25 basis points inside of a conduit that priced in late December 2016.

Meanwhile, the market cooperated. The volatility that whipsawed spreads during much of 2016 was nearly nonexistent last year. With only a few exceptions, spreads for CMBS conduit deals remained in a relatively tight band. Benchmark bonds--those with the highest possible ratings and 10-year average lives--started the year pricing at spreads of 88-95 basis points more than swaps. The year's last conduit, UBS Commercial Mortgage Securitization Corp. 2017-C7, saw its benchmark class price at a spread of 87 basis points more than swaps.

That kind of stability allowed securitized lenders to price their loans with more certainty. A Mortgage Bankers Association survey found that second-quarter 2017 CMBS lending activity increased by 168 percent from a year before and by 117 percent from the first quarter.

Bond investors ate up what was served. As a result, every conduit deal that was issued generated a profit margin of at least 2.1 percent. One deal provided its lenders with a 6.4 percent margin. Investors were attracted by the relatively generous yields CMBS provided and the asset class's continued healthy credit metrics.

Underwritten debt-service coverage and loan-to-value ratios remained extremely conservative throughout the year. And the rating agencies haven't argued much. Moody's Investors Service, for instance, recently said its loan-to-value calculation had actually declined during the third quarter, while debt-service coverage ratios had increased. Fitch Ratings said much the same thing and cited a growing presence of loans with investment-grade qualities in conduit pools. But both rating agencies warned of the growing presence of interest-only loans in collateral pools.

Further good news: the "wall of maturities" that had been a concern for at least the last two years, was cleared without much fuss in 2017. But that could have an impact on loan origination volumes going forward.

Another potential negative impact is the slowdown in property transaction activity, which drives lending activity. Only $12.1 billion of loans were securitized 10 years ago in 2008, and MBA said overall lending volumes that year had declined by 62 percent from the prior year. And Real Capital Analytics said property sales were running 9.1 percent behind 2016 levels through November 2017. Both data points could indicate weak CMBS lending this year with fewer 2008-vintage loans maturing and fewer properties changing hands.

Some optimists point to the large volumes of short-term loans that were written in recent years--many to recapitalize properties that might have had issues refinancing their CMBS maturities. But even among optimists, few expect that 2018 CMBS issuance volume will top 2017's level.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at; or Michael Tucker, editorial manager, at

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