Wednesday, July 18, 2012

CMBS leverage at highest since 2007

Business Times: Wed, Jul 18

LANDLORDS are piling the most debt onto commercial properties in five years as Wall Street banks bundle the loans into bonds to meet rising demand from investors seeking high yields amid record-low interest rates.

The size of mortgages bundled into bonds will surpass 100 per cent of building values for the first time since 2007, before the market shut down amid the worst financial crisis in seven decades, according to Moody's Investors Service. That measure of leverage on loans tied to everything from skyscrapers to strip malls is poised to climb 4.3 percentage points this quarter, the New York-based ratings company said in a July 11 report.

Lenders are offering larger loans to win business as borrowers look to pay off a wave of debt taken out during the real estate bubble and as yield-starved investors are pushed towards riskier assets. More generous mortgages, a boon for landlords who need to refinance debt, may fuel concern that banks are reverting to practices that led to record defaults as late payments rise above 10 per cent.

"I wouldn't say we are in a danger zone, but we are leaving the comfort zone," Moody's analyst Tad Philipp said. "The margin of error has been diminished."

Wall Street has arranged about US$16.8 billion in commercial mortgage-backed securities (CMBS) this year, compared with US$28 billion in all of 2011, according to data compiled by Bloomberg. Wells Fargo & Co increased its 2012 forecast to US$35 billion from US$25 billion last week, and Credit Suisse Group AG projects as much as US$45 billion in issuance this year. A record US$232 billion in commercial-mortgage bonds were sold in 2007.

Investors are buying the debt as the Federal Reserve keeps interest rates at record lows for a fourth year. Relative yields on top-ranked bonds linked to commercial mortgages dropped to 180 basis points more than Treasuries on July 13, down from 261 basis points on Dec 30, according to a Barclays Plc index. Elsewhere in credit markets, Toyota Motor Corp sold US$1.5 billion of three-year bonds in dollars two months after its last fixed-rate offering in the currency. Standard & Poor's said more than half of Europe's money-market funds by assets have closed because securities they invest in pay negative returns after the European Central Bank (ECB) cut interest rates. A benchmark index of leveraged loan prices rose for a 13th day, the longest streak in 20 months.

The US two-year interest-rate swap spread, a measure of debt market stress, climbed for a second day, increasing 0.61 basis point to 23.61 basis points. The gauge, which ended July 12 at an 11-month low of 22.5, widens when investors seek the perceived safety of government securities and narrows when they favour assets such as corporate bonds. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 0.9 basis point to a mid-price of 112.8 basis points,Bloomberg data show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 3.6 to 169.7. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan was little changed at 166 as of 8.49am in Hong Kong, Royal Bank of Scotland Group plc prices show.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals US$1,000 annually on a contract protecting US$10 million of debt. Bonds of New York-based Goldman Sachs Group Inc were the most actively traded dollar-denominated corporate securities by dealers on Monday, with 128 trades of US$1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Toyota, the maker of the Prius gasoline-electric vehicle, sold 0.75 per cent notes through its US finance arm to yield 58 basis points more than similar-maturity Treasuries, Bloomberg data show. In its May 17 offering, Toyota Motor Credit Corp issued US$1 billion of 1.75 per cent, five-year debt at a relative yield of 110 basis points, or 1.1 percentage points.

European money-market funds with assets totalling 79 billion euros (S$122 billion) have closed, out of a pool of 133 billion euros rated by the New York-based firm, S&P said on Monday in a report. Investor demand for haven assets sent yields on short-term government bonds from France, Germany, Austria and Belgium to all-time lows after the ECB cut its main refinancing rate a quarter percentage point to 0.75 per cent and its deposit rate to zero on July 5.

The S&P/LSTA US Leveraged Loan 100 index added 0.06 cent to 94.16 cents on the dollar, the highest since May 16. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has climbed from a five-month low on June 5 and has risen every day since June 27, the longest stretch since the 13 days ended Nov 9, 2010.

Leveraged loans and high-yield bonds are rated below Baa3 by Moody's and lower than BBB- by S&P. Citigroup Inc raised a US$312.5 million collateralised loan obligation (CLOs) for Jefferies Finance LLC, according to two people with knowledge of the deal.

The fund, JFIN CLO 2012, includes a US$183 million slice rated AAA by S&P that has a coupon of 150 basis points more than the London interbank offered rate, said the people, who asked not to be identified because the information is private. Jefferies Finance is owned by Jefferies Group Inc and Massachusetts Life Insurance Co.

CLOs are a type of collateralised debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return. In emerging markets, relative yields narrowed five basis points to 353 basis points, according to JPMorgan Chase & Co's EMBI Global index. That's the least since May 8.

Late payments on commercial mortgages packaged into bonds reached a record 10.1 per cent last month as bubble-era loans failed to refinance at maturity, according to Jefferies. More than US$23 billion of the debt issued in 2007 is currently categorised as delinquent, the most of any year, Jefferies analysts led by Lisa Pendergast said in a report on Monday. – Bloomberg

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