Investors at the Investment Management Network (IMN) CMBS conference held in London last week said it wasn't fear that was driving the current buying freeze in the European market. They also offered issuers a list of demands needed to get the market back in working order again.
Buysiders said that the market needed to better understand how dynamics have shifted before buying resumed. "Investors are good at pricing risk, but the mathematics have changed," said John Kerschner, head of credit at Woodbourne Investment Management. "Six months ago, we knew spreads were tight but there was a market out there. Now, there is no bid - you buy a triple-B investment and you own it."
Kerschner said there was never going to be a secondary bid for the lower end of prime CMBS paper, adding that it was preferable to buy into a deal's B notes.
Over the last six months, the most receptive investors have been at the bottom end of the capital structure.
"It's probably easier to shift the bottom part because there is more liquidity there than at the top, pricing is more attractive and you get better reward for the risk," said Jonathan Braidley, director of European commercial real estate finance at Marathon Asset Management.
It is important to remember that the fundamentals are not bad in the European CMBS market, Kerschner said. "To bring back liquidity, dealers have to provide better customer service and make it easier for the investor after the sale," he said.
The CMBS buyers present said there was also a need for a single-name, healthy cash index that can help the market find its benchmarks again. Until then, investors said spreads will continue to widen. "As investors, we want to know what is the lowest possible value for the security, and that determines how long we enter in the risk for - whether we take a shorter-term or longer-term view," said Jenna Collins, portfolio manager at Cairn Capital.
James Martin, head CMBS analyst at Merrill Lynch, said a triple-A index would provide value in transparency and liquidity. Markit has postponed the launch of the ECMBX Index based on the limited liquidity of the markets, both cash and synthetic.
The ECMBX Index is scheduled to consist of four sub-indices: a sterling-AAA, a sterling-BBB, a euro-AAA, and a euro-BBB. The indices will each consist of 20 single-name pay-as-you-go credit default swaps referencing eligible European CMBS bonds and are expected to roll on a semiannual basis. Constituents will be selected according to a defined set of rules.
Patrick Janssen, director and portfolio manager at M&G Investments, attributed the delay of the launch to a misalignment of needs between issuers and investors - investors saw the index as an opportunity to short the market, but banks need it as a hedging tool with the idea that buyers would go long on positions. "It's not what investors wanted at all," he said.
But the market will need to get back on track before the index is realized, and however painful this transition might be, the index might be the only way to have transparency and value across the curve.
"It's not a bad tool and it offers a different trading strategy," said Dalibor Jarnevic, vice president and portfolio management of fixed income at DWS Investment GmbH. "The important thing is that you need both sides of the market represented."
Investors also said they would like to see a departure from the Class X notes.
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