Donald Trump’s victory drew inevitable comparisons to Britain’s vote to exit the European Union in June, but so far the election results have failed to produce the kind of volatility seen in June – much less the extreme moves in financial markets experienced in January, amid concerns about China’s economy and falling oil prices.
In the commercial mortgage bond market, there was some early spread widening, but that was gradually reversed, and the market finished more or less flat, according to Manus Clancy, a senior managing director at Trepp.
“Last night around midnight, stock futures were really tanking, and that led to lot of people to think there was going to be Brexit-like reaction; obviously we didn’t set that this a.m., with the stock market heading up all day long, defying expectations,” Clancy said.
With volatility low and CMBS spreads little changed, conduit lenders have no reason to stop quoting loans, as they did in January, February and part of March, when issuance of commercial mortgage bonds slowed to a crawl.
Last week was the busiest week for private label CMBS issuance so far this year with $4.7 billion of deals pricing, according to JPMorgan. Lenders have been rushing to complete deals in advance of risk retention rules, which take effect Dec. 24. Clancy said the pace could continue, at least for another week or two. After that, there won't be enough lead time to complete transactions in advance of the deadline.
“We usually don’t see many deals launched after Thanksgiving” in any year,” he said. “In some years you might see a couple of single-asset deals in December, not nothing meaningful, and no conduits.
Longer term, Trepp thinks that Donald Trump’s victory could be a net positive for the CMBS market. A loosening of risk retention rules would reduce the cost of origination for conduit lenders, allowing them to offer borrowers interest rates that are more competitive with those offered commercial banks and insurance companies.
The combination of a Trump administration and a Republican Congress could also put greater restrictions on government-sponsored enterprises, though almost nothing is known about the president-elect’s views on the GSEs. “By reigning in Fannie Mae and Freddie Mac, the CMBS market would be poised to start picking up market share in the multifamily segment of the market, which the GSEs have come to dominate,” Clancy said in a report published late Wednesday.
Other market participants stressed that any relaxing of risk retention rules would have a mixed impact on structured finance markets, potentially boosting reducing the cost of issuance and boosting volume, but at the possible cost of lowering credit quality.
The rules, already in effect for residential mortgage bonds (albeit with significant carve-outs), require managers to hold on to 5% of the economic risk in their deals.
“Risk retention changes would have a big impact on CLOs,” said Brian Grow, a managing director at Morningstar Credit Ratings. “If it’s reduced regulations for lending on housing, it would have an impact on RMBS. It could weaken the credit for RMBS but it could also increase the volume. It just depends on what regulations would change.”
Moody’s Investors Service also warned that a relaxation of financial regulations would have mixed credit implications for structured finance transactions, including RMBS, CMBS and bonds backed by auto loans and leases.
“By requiring sponsors to maintain a stake in an asset's long-term performance, risk retention encourages more diligence in loan origination,” the rating agency stated in a post-election report. “However, a relaxation of risk retention requirements could result in an increase in new issuance of certain structured product types, particularly collateralized loan obligations, an area in which smaller managers could have difficulty raising the funds they need to retain risk in their transactions.