Real Estate Capital Forum: No single cause of widening CMBS spreads

There is no single cause for the widening in CMBS spreads that saw the last three European deals sell below par, delegates at Real Estate Capital’s Europe Forum 2015 heard today.

Three CMBS deals, from Goldman Sachs and Bank of America Merrill Lynch, priced below par and are assumed to have made losses for the respective issuing banks.

“You can’t really put a finger on [spreads widening],” said Bhavesh Patel, head of CRE loan distribution at Deutsche Bank. “There have been macro events, although not (in themselves) sufficient to widen AAA bonds from 100 basis points eight months ago to 165bps today.”

He said there were also “other things going on in the wider European ABS market”.

“There is a lot of supply and disappointment that the ECB hasn’t stepped in as a big ABS buyer. A lot of the market was long (in ABS) at the start of the year in anticipation that the ECB would.

“All those things together mean ABS pricing has widened out,” he said.

The CMBS investor universe generally is small and relative value-driven, and some are “not looking at CMBS in isolation”, Lee Galloway, executive vice president at bond buyer PIMCO pointed out. If PIMCO is looking at buying Italian CMBS for example, it will also see where Italian sovereign bonds are trading.  

Bank of America Merrill Lynch’s TAURUS 2015-3 EU DAC, a €145.8m securitisation of two loans made to Starwood Capital’s MStar Europe joint venture fund which was reduced in size, reflected price widening after being sold in September at a blended coupon of 280bps – a weighted average discount of 1.8% to par across the transaction. 

The underlying portfolio comprised 62 light industrial assets across France, Germany and the Netherlands.

The three most junior classes of notes within Goldman Sachs’ £646m Logistics UK 2015 CMBS, secured by a 42-asset portfolio owned by Blackstone’s Logicor, also sold at a 0.61% blended discount to par in July. Its Reitaly Finance CMBS, a securitisation of a €181.95m loan to Apollo Global Management, secured against 25 Italian retail assets, priced at a blended all-in margin of 317.4bps after five of the six tranches were discounted.

Panel moderator David Newby of Natixis asked how senior management at investment banks views warehousing CMBS loans that are subsequently sold at a loss.

BAML’s CRE director Greg Clerc said: “When you are long, you have to sell. Sometimes, selling at a loss is not a bad thing; sometimes it’s a case of minimising loss.”

Clerc said the focus for the bank is “velocity of inventory”.

The panellists were relatively subdued in their projections for European CMBS issuance next year – sentiment mirrored by an audience vote.  

Consensus was that volumes would come in around the €6bn mark, around the same level as is forecast for 2015. There has been about €5.5bn of CMBS issuance so far this year.

Patel said after the recent volatility, the market may see “a slower start to next year” although he expects the second half of 2016 to get “back to fairly regular issuance like earlier this year”.

Euan Gatfield, CMBS managing director at Fitch said: “New supply causing spreads to widen suggests the investor base is not thick enough across the [CMBS] market, especially given year on year declines in ABS issuance”. If issuance of other ABS product were to fall off, it might allow CMBS to “muscle in a bit”, he said.