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CMBS Spreads Widen, Signaling Bearishness

Following on the heels of debt downgrades and a bipolar Dow Jones Industrial Average, the market for commercial mortgage-backed securities (CMBS) sauntered back a few steps, showing declines in special servicing loans to 12.3 percent over the second quarter this year. Successive reports from analytics company ""Trepp"":http://www.trepp.com/main.cgi and the ""_Wall Street Journal_"":http://online.wsj.com/article/BT-CO-20110809-714685.html spotted troubling trends for CMBS markets, with credit looking to further tighten and borrowers poised to shoulder the consequences.


CMBS spreads tumbled over Monday and Tuesday as investors boarded the selloff bus to avoid risk in the wake of renewed recession fears. In line with special servicing losses, performing loans also fell to 29.5 percent over June, dipping from 30.5 percent in March and 33.6 percent from 2010, according to the _Journal_. Trepp chalked up the trends to a bearish market that showed signs it would emerge from hibernation back in May.

""Yesterday was just a downdraft for all the capital markets,"" says Manus Clancy, senior managing director for Trepp. ""U.S. equities got crushed and I think it was inevitable that you would see a big spread widening among credit assets and bond segments.""

The analytics company revealed that spreads on ""super-duper"" legacy loans expanded by some 60 to 90 basis points on average, varying by age and collateral quality. Meanwhile, AM bonds pushed spreads by 125 to 175 basis points for loans backed with garden variety collateral. CMBS serviced by financial institutions with fewer assets and less name recognition traded at 900 swaps around midday.


Junior bonds, also known as AJs, widened by 200 to 300 basis points on average among better-known institutions. Much as with CMBS from the AM field, AJ bonds made in 2005 and 2006 received quotes that leapt some thousand basis points above swaps, Trepp said.

Among GSMS, GG10 A4 bonds closed at 305 basis points above swaps, with handling cresting at $105 from the past week. GG10 spreads broadened by 35 basis points before opening day for U.S. equity markets, and then closed at 400 over swaps, widening by only 95 basis points and trading at $102 on average.

""We're in a stretch right now and there's more to it than just yesterday,"" says Clancy.

Rather than heap more blame on ""Standard & Poor's"":http://www.standardandpoors.com/SPComIPResolver downgrades, the managing director attributes the CMBS tumble to signs of a double-dip recession first reported by the ratings agency's Case-Shiller home price index in May. He rests his conclusion on home prices that fell to 3.6 percent over the first-quarter and never fully recovered over a tepid summer.

""It's starting to become more difficult for borrowers to get money from the capital markets,"" he adds.

Clancy describes trends in CMBS markets over the past several months as reversals for an otherwise promising period of recovery. He says lender confidence eroded in the fallout from continuing economic distress, and credits lender skittishness for spread volatility and basis-point hikes that slowed trends in commercial real estate to a crawl.

The recent downgrades ""made all the CMBS lenders scale back and become much more risk-averse, leaving borrowers with much less capital to refinance their properties,"" he says. ""That all trickles down to the borrower by crimping credit just when it looked like we had turned a corner.""

""[E]ven though the CMBS market has improved overall, until transaction volume rises, distressed properties are cleared out of the pipeline, and job creation rebounds, we won't see a consistent upward trend,"" the _Journal_ quoted Michael Gerdes, a spokesperson for ""Moody's"":http://www.moodys.com/ Investors Services, as saying.