Tranches in Freddie Mac’s multifamily securitizations — known as K-deals — are more appealing investments than their comparable conduit counterparts, even in deeply uncertain macro circumstances, said Barclays analysts in the bank’s CMBS Strategy Weekly report.
Barclays lists collateral characteristics to show how eventual losses should be limited, even in a downfall as drastic as the one in 2008-2009.
One of the collateral strengths of K-deals is steady issuance. Although The first K-deals were first issued in 2006, volumes have remained strong even after turbulent times in 2010. For example, in 2H 2011, K-series issuance remained at about $2-3 billion a quarter across seven-year and 10-year collateral, regardless of substantial macro pressures. In contrast, new conduit issuance has been more dependent on secondary spread movements, and therefore fell off considerably during the same period. Barclays analysts said that this trend is predicted to continue in the near future as well, as the apartment sector remains strong.
A second collateral characteristic that K-deals have over conduits is limited spread volatility. Although the spreads on these transactions were expected to exceed the senior tranches that have an agency guarantee on any realized losses, the unguaranteed mezzanine classes of K-deals have also surpassed other comparable sectors. The mostly single-A rated series Bs with a 7.5% credit support, for instance, have widened 50 basis points from their levels in March 2012.
In contrast, single-A-rated new issue conduits with 12% enhancement gapped out 100 basis points.
Barclays believes collateral could improve in 2H 2012. Figures show that LTVs on 10-year term new issue K-deals have been around 68, while DSCRs are about 1.4x. Also, LTVs have been marked marginally higher on the seven-year collateral deals, which have been an average of about 70. Although the average LTV and DSCRs do appear somewhat comparable with new issue conduits, Barclays said the key difference is that K-deals is exclusively multifamily, whereas many conduits are backed by retail properties.