Overall, the CMBS market could be positioned for more growth this year, as investors flock to the sector's stable track record and, in some cases, relatively cheap pricing. Global issuance last year reached $256 billion, up from $138 billion in 2004. And this year, high-end forecasts call for global issuance to reach some $320 billion, according to Citigroup Global Markets.
Issuance within the U.S., however, could be set for a slight decline. In a conference call held last week, RBS Greenwich Capital said it is anticipating CMBS issuance to decline within the U.S. in 2006. U.S. issuance reached $167 billion in 2005, which was a 75% increase from 2004. But, the firm is forecasting a 6% dip in issuance this year to $157 billion. According to RBS, "gold mine fever" within the commercial real estate market hit its peak in 2005. Additionally, a smaller portion of refinancings will help to keep issuance volume down.
What is the big draw for CMBS investors? For new investors, a big attraction for at least fixed rate triple-A bonds is the 30% credit enhancement structured into them since early 2005, according to Citi. Such a cushion would require that at least two-thirds of the underlying loan pool default at a 40% loss range before the structure would actually incur any principal losses, the investment bank finds. "This level of credit protection should withstand any U.S. economic slowdown or recession that may be on the horizon," Citi wrote last week following the Commercial Mortgage Securities Association's conference in Boca Raton, Fla.
For general portfolio managers, such a deal looks cheap - considering the bonds are trading around 35 basis points over swaps. According to Citi, as investor demand continues to grow, those bonds are likely to become less of a bargain. And, following the record attendance of the recently concluded the CMSA conference, spreads did come in. Citi is expecting investor demand to "grow in leaps and bounds in 2006 and tighten our traditional cheap trading relationship as these new participants enter the market."
On the other end of the capital structure, RBS Greenwich said caution should be exercised on recent-vintage triple-B minus credits. Even though the bonds have widened by 60 basis points from year-end 2004, to swaps plus 185 basis points, the investment bank pointed out that those spreads aren't wide enough, and are likely to widen.
And as far as new liquidity being found in the talked about CMBX index, participation among cash CMBS buyers might not catch on as quickly as it the trend was within the home equity ABS space (see article, page 1, top). According to Citi, a "tepid" response by conference goers to the intention of participating in the synthetic CMBS market would indicate the sector would at least initially be an inter-dealer market.
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