The surprise Brexit vote blindsided the US CRE finance industry and could potentially derail modest progress to the faltering US CMBS markets, according to Kroll Bond Ratings Agency.
Though private-label CMBS volume has slowed to levels last experienced in early 2012, down 48 percent year-over-year, there’s a “robust pipeline” slated with up to five conduits in the market that should close by the end of August. But even modest spread widening due to the Brexit ‘leave’ vote, a big surprise among industry professionals, could stall issuance going forward, the ratings agency said.
“The shock of the unanticipated outcome surrounding the Brexit vote still lingers,” KBRA wrote in its monthly CMBS report. “Our industry was among those that were caught off guard. At [CRE Finance Council’s] June conference, none of the participants from the Industry Leader’s Round Table thought that UK voters would choose to exit the European Union.”
Regarding any “new round of spread widening,” KBRA said that “even if it is more modest than what occurred earlier this year, [it] will further derail origination activity.”
On July 1st, the fist post-Brexit CMBS deal was noticeably wider than the four conduits that priced during the latter half of May. The SGCMS 2016-C5 ($736 million) deal priced at swaps (S) +138 bps for AAA LCFs and S+ 760 bps for BBB-.
However, “despite the widening, one could argue that the deal fared well considering market volatility in the wake of the Brexit vote,” according to KBRA. “Volatility seems to be settling down – while we are hopeful that this continues to be the case, it is far from certain at this point, and we are hopeful the market doesn’t experience another round of spread widening.”
KBRA published presales for three deals ($1.2 billion) over the course of June, including two single-asset, single-borrower (SASB) transactions and the SGCMS conduit.