CHICAGO - Despite price tightening in the triple-A and triple- B levels in CMBS, panelists at Information Management Network's Insurance Investing Summit last week said that there is still a lot of opportunity in double-B CMBS and some in double-As and single-As.
Participants in the session on CMBS portfolio investing said that the CDO bid in triple-B product has caused pricing to come in dramatically for triple-B CMBS paper. This has recently caused investors to flock towards other higher-yielding products such as home-equities. Aside from this, a strong secondary market for double-Bs has also emerged, where paper has been "trading quicker" and investors can pick up more yield.
Panelists added that some investors who like quality but who are also going for more yield are now after double-A and single-A credits, rather than sticking with triple-A paper.
One panelist noted, however, that the problem with staying with the investment-grade sector is that there is not enough out there to buy.
Anthony Giannini, regional manager at Manulife Financial, said that the future for insurance companies investing in CMBS would be to go down the double-B route.
Terrorism insurance was also in the forefront of the discussion. James Titus, senior vice president at GMAC Institutional Advisors, said that this issue is specifically important to his company with GMAC being a lender for the World Trade Center properties. In fact GMAC Commercial Mortgage's Chief Executive Officer David Kramer recently met with President George Bush to discuss the issue.
Some panelists said that the industry will figure out a solution within six months to a year: insurance companies will find a way to sell their product while dealers will somehow manage to bring large loan deals to market.
However, other panelists argued that there are issues that will continue to trouble the sector for as long as no government action has been taken. How, for instance, would lenders force borrowers to avail themselves of terrorism insurance? Is the threat of foreclosure an appropriate method? How about properties in deals that are five to ten years old? How are existing loans going to be refinanced?
Jack Verschuur, senior vice president at Mutual of Omaha, said that his firm had made a policy of not making loans on and in close to trophy properties. He said that they were considering a property that was about three blocks away from the Sears Tower in Chicago, but senior management decided against it because of proximity.
Investors are looking at the risk from various angles: some look at the lack of terrorism insurance as a downgrade risk while others are concerned about event risk.
Other points of discussion
Panelists also talked about notching as an important issue. They said that there is talk in the market that Fitch Ratings would disappear from the CMBS arena because of the issue of notching. However, many dealers, they said, would like Fitch to remain, from a competitive standpoint.
Frank Linneen, a principal at Lend Lease Real Estate Investments, Inc., noted that his firm bought bonds in a deal that did not have a Standard & Poor's rating. From the perspective of a buy-and-hold investor, he said, it was a chance for them to get a little bit better spread.
On the credit side, panelists said that B-piece buyers are getting more vigilant. Current CMBS deals really don't have operating-type businesses and healthcare loans and have very few hotel properties.
