CMBS offers relative value, but some question the depth of investor demand, reports Lauren Parr
European CMBS still offers great relative value. Spreads have tightened on senior bonds, but they look very cheap compared with corporate credit. AAA-rated bonds can now be traded at inside 2%, compared with 4-5% 24 months ago. “Hedge funds, global asset managers and banks’ treasury teams are the investors buying [CMBS] now,” says Ope Agbaje, executive director of European fixed income structured products at Neuberger Berman. There is also demand from US investors attracted to the relatively high yields.
The CMBS investor base may not be as deep as that for more liquid European RMBS, for example, but “a lot of investors are out there, though typically not banks that used to be big asset-backed securities buyers and are still active in some other ABS asset classes”, says Damian Thompson, head of ABS structuring at RBS. “We’ve seen constant pressure on credit spreads, so compared to other products such as residential mortgages, CMBS looks good relative value for people with the skills and appetite to add assets.”
The secondary market has an estimated turnover of £10bn a year, according to Bank of America Merrill Lynch, which would represent around 15% of outstanding CMBS. “A lot of guys with a lot of cash to spend were hoping for a big price correction following last year’s rally, but that hasn’t happened,” says Patrick Janssen, M&G Investments’ ABS portfolio manager.
“They now realise a sell-off is out of the question, so they might as well spend now, especially as [new ABS] supply hasn’t been great. Since the Bank of England’s Funding for Lending scheme came out there has been hardly any UK RMBS issuance.”
Different CMBS investment strategies
Cairn Capital invests in CMBS for fixed- income clients. Head of property Peter Hansell says: “CMBS is something we know and understand. Investors have different pots of money with different strategies.
Some are trading in and out; they will want to see more paper coming into the market so there’s enough that they can trade. Others are looking to hold it for a longer term.”
However, not everyone believes demand for CMBS is steadily growing. Agbaje is focused only on managing clients’ legacy CMBS. “We don’t have clients that want to invest in CMBS,” she says. “The only interest in ABS in Europe is in very liquid paper, such as UK prime and Dutch RMBS.”
Paul Rivlin, joint chief executive of Palatium Investment Management, says of new issuance: “I’m sceptical if someone says there is demand: it’s not obvious why there should be. They could be banging the drum. One problem of getting the market going is that investors are not very interested.
“Last time, a lot of bonds were bought by treasury desks simply seeking yield increases, as opposed to other things they bought. They thought they were getting a safe investment. One bitten, twice shy.”
Perhaps the fact the banks’ CMBS analysts are more bullish is not surprising. Deutsche Bank’s latest note is typical: “Speaking to clients in the past few months we’ve been surprised [on the upside] in terms of the appetite for the right CMBS today.”
JPMorgan and PIMCO take starring roles in CMBS revival
PIMCO and JPMorgan are two of the most active buyers of new issuance since the European CMBS market reopened in 2011. Last September, JPMorgan bought €565.5m of bonds in a 75% investment across five tranches of the Florentia CMBS, secured against the Vitus German multi- family apartment portfolio – a deal it coveted for its stability.
Sources speculate that the US bank had two potential strategies: either it bought the bonds for its treasury desk’s portfolio of added-value assets, using capital that must be kept in liquid assets; or the trading desk may have bought them, hoping yield compression would push up their price.
JPMorgan was one of the main players in property-backed debt during the boom. It invested in Europe’s largest-ever deal, GRAND, which has been extended (see p19), as did PIMCO, BayernLB, ING Investment Management, Landesbank Baden-WÃ¼rttemberg and Standard Life.
PIMCO is taking part in resecuritisations of deals it already owns positions in. With Marathon Asset Management, it has made a £263m bridging loan to Toys R Us to repay the retailer’s Vanwall Finance CMBS, and both will invest in a new deal secured on the assets, called Debussy DTC.
PIMCO may also buy into a new CMBS to be secured on Chiswick Park. It is familiar with the asset as a noteholder in the existing DECO 2011-CSPK, as are M&G, BlackRock and Legal & General – also seen as natural buyers of the new CMBS.
The global bond fund manager last year bought the €238.78m Green CMBS portfolio and the £1.14bn Diversity Funding CMBS from Germany’s central bank. It is bidding on loan portfolios including NAMA’s €810m Project Aspen and Eurohypo’s €5.2bn UK loan book.
M&G bought bonds in Deutsche Bank’s Florentia last year, along with JPMorgan, Ignis, Cheyne and ING. It also provided up to €100m in a five-year mezzanine loan as part of a wider investment in the CMBS deal.