AMERICAS NEWS: Resuscitating securitisation

In 2011, CMBS issuance could almost double, with up to $30 billion in new deals expected to come to market, according to a Jones Lang LaSalle investor sentiment survey.

Okay, it’s a far cry from the peak of 2007, when the market reached a zenith of $250 billion. For most US real estate professionals, however, the resuscitation of the securitisation industry is a welcome sign that liquidity is – slowly, but surely – returning.

Indeed, senior real estate executives told the Emerging Trends 2011 report, published by the Urban Land Institute and PricewaterhouseCoopers last month, that they expected new issuance to climb to between $75 billion and $100 billion “within a few years”.

However, could recent regulatory reforms dampen the speed of any recovery in the US securitisation market?

We can’t turn back the clock to when most assets, including real estate, were funded on balance sheet.

Lewis Ranieri, founder of Ranieri Real Estate Partners and the father of the mortgage-backed securities market

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July, ratings agencies became liable for the first time for the ratings attached to CMBS. The change immediately prompted the nation’s three dominant agencies,  Standard & Poor's, Moody's Investors Service and Fitch Ratings, to ban the use of their ratings in documentation for new bond sales. That action, in turn, saw the Securities and Exchange Commission promise to take no action against offenders until at least January 2011.

But as Lewis Ranieri, founder of Ranieri Real Estate Partners and the father of the mortgage-backed securities market, asked at the annual Association of Foreign Investors in Real Estate conference in Chicago: “What happens after January 2011?”

Ratings are crucial to the proper functioning of the CMBS market, and CMBS is crucial to the proper functioning of US real estate capital markets, Ranieri explained. “We can’t turn back the clock to when most assets, including real estate, were funded on balance sheet,” he said. The “diminution in value” that would occur from just balance sheet lending would not, he predicted, “be a very comfortable thing to contemplate”. As a result, securitisation is “at a crossroads”.

In the meantime, though, new CMBS issuance is coming to market.

JPMorgan was one of the latest banks to price a $1.1 billion pool of 30 loans secured against 47 properties. According to people familiar with the deal, 67 percent of the pool was backed by retail properties, with the remainder backed 16.5 percent by office, 10.3 percent by industrial, 5.3 percent by mixed-used assets and 0.8 percent by self storage. H2 Capital Partners acquired the pool’s B piece, while the debt-service coverage ratio and loan-to-value was 1.66 percent and 60 percent, respectively.

It is the spreads above Treasuries and swaps, though, that currently is giving the CMBS market a competitive edge, sources said. Pricing for the JPMorgan deal saw spreads of around 150 basis points for AAA tranches. Historically, those spreads would have been closer to 30bp.

“There is a lot of room for improvement on spreads,” one executive said. That, he added, was giving CMBS players “fire power” to go out and win deals.