Tuesday, April 21, 2009

The Debts of the Spenders: Late April Update Narrower CRE Bond Spreads And Bridge Loans

Commercial real estate (CRE) spreads continued to narrow this week. AAA rated tranches continue to trade in a choppy (seemingly) directionless market. But big improvements are evident in the lower rated BBB tranches.

(These narrower spreads are another reason to avoid leveraged ETF funds such as SRS. If you are bearish on CRE then stick w/shorting individual REITs or even the non-levered ETFs such as IYR).

Source: Markit CMBX Indices http://www.markit.com/information/

Institutional funds have begun to turn bullish on this sector w/comments such as this:

Richard Carswell, business development manager at OPM, which runs a multi-asset property fund, said restrictions on investors removing money from property vehicles had "artificially propped up" bricks and mortar valuations.

He said: "In any future general recovery in sentiment towards property, bricks and mortar will struggle to perform, while Reits, trading as they are on huge discounts to NAV, will substantially outperform bricks and mortar."

But Howard Meaney, head of property investment at LV=, said although losses for 2009 would total 10-15 per cent, declines could reverse in 2010 and recovery could begin in 2011.


How can this be? Commercial real estate spreads narrowing in the face of extremely bearish fundamentals?

But Jeff Bernstein, Urbandigs.com writer and all around real estate savant, has an alternate theory which he pens in an excellent article, "Loan Extensions - Bridge to Nowhere?"

Stalling tactics! Everywhere I look I see them. The Fed accepting shakier and shakier assets as loan collateral, mortgage forbearance programs and, increasingly, bank loan extensions. In fact, the whole TARP/TALF/PPIP monstrosity embodies it.




Anonymous said...

I am sorry but your analysis is a little off. CMBX prices are flat to modestly lower on average across all tranches and the optically significant moves in AAA spreads are so high compared to their 35bps coupons that price is almost negligibly impacted (duration is almost zero). FYI - CMBX will switch to trading on price this week (as opposed to spread) - should make no difference to actual trading but will clarify some levels for many.

Anonymous said...

Me, Anonymous again. did some digging for us...from 4/9 close, average CMBX tranche (across all vintages/quality) fell modestly from $35.51 to $35.4. The AAAs mostly underperformed with only the oldest (1 and 2) vintage BBB/BBB- actually seeing any price rise but that was minimal. The tricky thing with looking at optically massive spread changes (like BBB.2 -163bps in the last two weeks or so is that it only moved the price about $0.20 up because the tranches coupon is only 60bps and it trades at 4200bps!). Hope this helps.

In Debt We Trust said...

Thank you so much for clarifying these points. I am not a credit trader so this thing is still relatively new to me.

I am used to seeing the spread instead of price so that led to some confusion there.

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