Market Alert: CMBS 2.0 Takes a Blow - Borrower Beware

July, 2011

Market Factors

  • Bond Pool GSMS 2011 GC 4 was pulled from the market today due to S&P not being able to provide a final rating on the bond pool. The $1.5B offering from Goldman Sachs and Citigroup, which was set to close this week, was scrapped at the last minute as S&P indicates they are in the process of reviewing their methodology and criteria for rating commercial mortgage-backed securities.

  • Weak demand for bonds caused by the overhang of the debt ceiling debate in Washington and a lack of confidence in the global economy has resulted in a significant widening of spreads over the last three weeks.

  • Subordination levels below what investors are comfortable. GSMS 2011 GC4 saw its initial subordination level drop below 15%. Investors did not respond well to this. It is expected that investors will demand subordination levels between 20% and 30% going forward. This could potentially result in lower overall LTV and higher spreads on new loans.

  • The Market is dislocated. Several lenders have put a hold on quoting deals and we know of at least one lender that has invoked the MAC clause in their commitment letters to cancel all pending deals.

  • Heightened volatility in CMBS has caused CMBS loan originators to proceed with increased caution when quoting new loans, both from a pricing/hedging perspective as well as a perceived investor credit perspective

Implications for Borrowers

  • Spreads have widened significantly on CMBS mortgage loans along with CMBS bond spreads in recent months. According to our sources, current indications are breakeven levels around +295 for five-year loans and +240 for ten-year loans, which are about 100 basis points wider than levels seen just a few months ago. Anecdotally we are seeing current quotes on transactions less than $5M in the +325 range for 10 year deals; however, given the volatility in the market, spreads are changing daily.

  • More selective lending given the increased willingness of investors in CMBS 2.0 to walk away from transactions or demand changes to structure and/or pricing exerts pressure on lenders to turn out stronger transactions

CMBS Volume Update

  • Just over $20 billion in CMBS has hit the market year-to-date. Even given the recent volatility, experts are still projecting around $40 billion in new supply for full-year 2011, but acknowledge that projection could be overly optimistic if recent volatility does not subside.

Advisory Position

The BSC Group is advising clients to tread carefully if they have a transaction in the market; there is a high likelihood that deals will move around as lenders react to these recent developments. If you are looking to enter the market with a new transaction you may want to think about letting the dust settle before moving forward.

We will continue to provide updates to our valued clients as the story plays out.

Advisory Position

The BSC Group is advising clients to tread carefully if they have a transaction in the market; there is a high likelihood that deals will move around as lenders react to these recent developments. If you are looking to enter the market with a new transaction you may want to think about letting the dust settle before moving forward.

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