Commercial mortgage-backed securities are among the asset classes that are experiencing selloffs induced by the banking crisis that has unfolded over the past three weeks.
Ed Shugrue, portfolio manager for the New York-based RiverPark floating-rate CMBS fund, said banks are raising capital defensively through offloading CMBS and other mortgage-backed securities, given an uncertain market outlook. The CMBS market is under pressure due to a supply-demand imbalance caused by a sudden influx of bonds into the market.
The failures of Silicon Valley Bank and Signature Bank continue to take their toll on the markets. “SVB’s collapse created a mini liquidity squeeze in the MBS space with asset managers increasing cash by selling assets and creating a supply-demand imbalance that reduced CMBS prices,” Shugrue said. “We had solid price improvement in CMBS from the first of January to the end of February, and then SVB took us back to January levels.”
There is one short-term saving grace – the 85 percent plunge year-over-year in new issuance through the end of the first quarter of 2023 could alleviate some of the current supply-demand imbalance. As of Friday morning, there was one new deal in the market – the second five-year conduit offering to be shopped. The $1.03 billion transaction is led by a consortium of bank lenders including Wells Fargo and Morgan Stanley. More than 60 percent of the deal’s loan pool is backed by office and retail properties, according to Fitch’s presale report.
“Bank consolidation and liquidity concerns have made market-makers somewhat gun-shy, post-SVB and [the sale of] Credit Suisse,” Shugrue noted. “That said, it was encouraging to see the new issue market re-open this week.”
Anuj Jain, director of CMBS strategy at Barclays, noted that the sentiment in the CMBS market is still largely negative: “There is basically very limited appetite for anybody to add to the CMBS/CRE holdings.”
Still, there are some buying opportunities in CMBS as spreads widen and the pricing is down compared to corporate bonds.
“You can take conduit [last cashflow] triple-A CMBS as a separate class from what is going on in theory, because that is a very safe structure from loss and credit rating perspective, and if you look at that purely based on the relative value, it looks very good right now.” Jain added.
Down the capital stack, deals should be analyzed case-by-case, Jain continued, but the CMBS market sees opportunities for credit-focused investors to pick value because there are additional pressures on the sector.
New York-based data provider Trepp tracked the CMBS delinquency rate moving sharply higher in February 2023, up 18 basis points to 3.12 percent from the previous month. The delinquency rate can further increase as more CMBS loans approach their maturity.
According to the data provided by Barclays, 2023 will see more than $40 billion in both agency and private-label CMBS mature, followed by nearly $100 billion of CMBS scheduled for maturity in 2024. The maturing momentum will intensify market players’ pressure on refinancing.
Jain said the possible trend is that CMBS extensions will pick up, which will help earn more time for borrowers to gain liquidity. “[Borrowers] will extend the loans, and then hope that situation stabilizes in 12 or 24 months, and they can refinance the loan by that point,” he added.