After the Japanese crisis, CMBS secondary market activity was the most impacted versus all other securitization sectors, experts said.
However, by Tuesday last week benchmark GG10 A4 bonds had tightened to around +200 basis points over swaps compared to a wide of +255 at the height of the crisis, according to Lisa Pendergast, managing director of strategy and risk for CMBS and other real estate debt at Jefferies and Co. "The markets have rebounded nicely," she said.
During the week the tragedy in Japan occurred, the volume of CMBS bid lists was very heavy. However, according to Pendergast, not many bonds traded if the levels proved to be unacceptably low.
"There was prudent price discovery going on, but many investors recognized that some of the wider prints were simply a knee-jerk reaction to the catastrophic events and not a true measure of CMBS valuations," Pendergast said. Just two weeks later, the market appears to have recovered nicely from the knee-jerk selling that occurred right after the earthquake.
Pendergast said that the Japanese effect might be more of a "short- to moderate-term issue" while the Middle East crisis might have more long-term consequences in terms of the market psyche.
Ultimately, commercial real estate (CRE) valuations and U.S. economic recovery both hinge on the strength of job creation here in the U.S., she said.
Effect on CRE
The immediate impact of the tragedy in Japan, according to Ron D'Vari, co-founder and CEO of NewOak Capital, is the volatility in commodity prices that puts pressure on CRE. Retailers have exposure to the movements in global commodity prices and inflation and, generally speaking, the impact is not necessarily positive.
"It affects fundamental commercial real estate in the immediate future," he said. "It impacts the retailers. Oil going up has a negative bearing on real estate, as it reduces potential sales - people have less discretionary income to spend."
D'Vari said that in the long-term, although what happened to Japan is definitely a tragedy, this might serve as a "catalyst to restructuring the way capital is allocated in the country and focus on domestic consumption."
Additionally, he said that the future reconstruction and reform would attract global capital back to Japan on the margin. These are the investors, including domestic, who have left Japan to go to places like Vietnam, Korea, Indonesia and other countries in Asia. "However, on a short-term basis, the currency volatility and commodity prices shooting up have caused shocks that have affected CRE," he said.
By contrast, the Japanese situation might have some positive impact on ABS. "The reason is that credit cards and autos are short-term investments , which perform much better than CMBS and RMBS because these are long-dated liability loans," D'Vari said. "This is to the extent that investors move into higher-quality credit and shorter-duration assets, which tend to be consumer ABS. You could see that playing out as investors wait to readjust and reallocate later."
Ultimately, D'Vari said that this will improve Japan's expected GDP growth, which can happen along with some consumer spending reform. He cited Warren Buffet saying that Japan provides unique investment opportunities. This inflow of investments attracts capital growth that feeds back to the U.S. and Western Europe.
He added that this is different from the 1973 oil crisis that killed the economy. "That was extreme, that's not what is going to happen," D'Vari said. "Even with the yen rallying so hard, the problems will ultimately smooth out in the long-term."
However, a drawback is that, aside from Japan, there are other negative events happening simultaneously, including the G7 monetary and fiscal policies and the political risk brought on by the situation in the Middle East. "These have piled on top of one another," he said.
ABS Impact
After the first week of the Japanese crisis, the secondary ABS consumer market was comparatively stable even given the added factor of continued Middle East conflicts, according to ABS analysts.
Although most ABS products have experienced slight spread widening, Barclays Capital analysts said at that time that price performance versus other securitized sectors had been strong.
They added that the biggest risk they see is that the increased volatility in the broader markets could cause investors to sell their most liquid holdings, which usually means consumer ABS.
Any such liquidity-driven selling could result in near-term consumer ABS spreads widening, which will be based purely on technical reasons, Barclays researchers said.
In terms of affecting activity in the consumer ABS market, analysts believe that it may be hard to quantify the impact of the problems in Japan on consumer ABS securitization volume.
John McElravey, a senior analyst at Wells Fargo Securities, said that the general market volatility resulting from both the Japanese and the Middle East crises can temporarily temper domestic issuance.
McElravey is predicting consumer ABS issuance in the vicinity of $105 billion for the entire 2011, which is higher than the numbers seen last year.
It seems like there are two outcomes to delays in parts or vehicles coming from Japan. First, buyers could switch to domestic vehicles if they need a car right away. Second, buyers could wait and buy the import car later.
"That's not an increase in net debt, you're merely moving the chairs around. That doesn't change the number of people buying cars in the U.S.," he said.
McElravey said that one scenario where there could be an increase in ABS volume is if the Japanese automakers would need securitization to access more credit. "They might choose to securitize to free up other assets to help fund recovery," he said.
