Tuesday, January 1, 2013

CMBS 2013 Outlook

The CMBS market has certainly enjoyed a revival during 2012 and there are a number of reasons to be optimistic about 2013 including the pick up in originations, continued low rate environment, and improved fundamentals within outstanding CMBS deals. Morningstar notes that the consensus is that it's gotta be better than 2012. Some quotes from RBS and CS reports can be found here. The best write-up we've seen so far is Nomura's, and you can contact your sales coverage there for a copy of the 12/6/12 2013 Outlook: The Road to Recovery.

Some of the points others have highlighted as positive include:
  1. The mix of maturing loans shifts from the heavy burden of 5 and 7 year loans originated between 2005 and 2007 to 10-year loans originated in 2003, which results in lower term and maturity risk. Maturity risk should remain muted the next 2 to 3 years, but ramp up in 2016 and 2017 when 10-year loans from 2006 start to mature. Further, as Nomura points out, prices are back to 2005 levels (still down 26% from the peak), so fewer 2005 loans are not "under-water".
  2. Issuance could exceed $100 billion (Nomura >$100 b, Morningstar - $50-75b), although this is partly driven by the deterioration in underwriting we've witnessed in 2012. Nomura breaks it out by $41b in Conduit, $10b in Agency, and $53.2b in Agency.
  3. Delinquencies have likely peaked - Nomura
  4. Capital availability has led to increased transactions ($200b in 2012, up 8% - Nomura)
  5. Fewer modifications expected as climate improves. This is due both to easier availability of credit to borrowers so they can lend their way out of problems, but more towards the ability of lenders to foreclose on properties and sell them.

Some negative counterpoints include:
  1. $40+ billion in defaulted loans are still in the pipeline. We should see increased loan sales from this pool.
  2. Deal losses will continue to grow as delinquent loans are resolved. Nomura is looking for an increase from 2.9% deal-level losses on 2005-2008 vintage loans to 5% by the end of 2013.
  3. Dodd-Frank - pretty much everyone made a passing reference to legislative risks, but there was less focus than on other risks.
  4. Prices are too high, and the easier credit is going to cause more bonds to pay off at par, faster than premium buyers are expecting - RBS & CS. I certainly wouldn't be buying premium front or next pays right now either. RBS recommends buying further down the stack, and that is in line with what we did late in 2012.


crabsofsteel said...

Think back to a year ago, when the sell-side was saying that mezz bonds were underpriced, until they stopped cashflowing in 2012. And don't you think Morningstar, who gets paid on all sides of CMBS transactions, may be a little conflicted? You have to slog through all the details yourself, ain't no choice in the matter.

Jingle Male said...

If it makes you feel any better, Nomura is negative on 2005-2008 AJs and subs