UPDATE:Commercial Mtge Bond Market Extends Rally From Tuesday Fed Move
May 20 2009 - 12:01PM
Dow Jones News
The buying binge of bonds backed by commercial mortgages
gathered momentum Wednesday, as the Federal Reserve's announcement
the day before that it would expand a key lending facility
continued to resonate with investors.
The central bank will offer loans to investors to buy existing
commercial mortgage bonds through its Term Asset Backed Securities
Loan Facility, or TALF. This will benefit the holders of such
bonds, mainly banks and insurance companies.
Risk premiums on the cash bonds tightened by 80 basis points to
565 basis points on Wednesday, according to Derrick Wulf, senior
portfolio manager at Dwight Asset Management in Burlington, Vt.
The Fed already provides loans to buy newly created bonds backed
by consumer loans and equipment lease loans, among other debt,
through TALF. The Fed had proposed extending these loans to newly
created commercial mortgage backed securities earlier this
month.
On Tuesday, the central bank expanded the collateral it will
accept to so-called legacy, or existing, securities, starting in
July. It specified, however, that only the super senior, or the
least-risky portions, of commercial mortgage bonds would be
eligible.
"The actual details were largely expected, but the clarity is a
favorable development for the market," said Aaron Bryson, an
analyst at Barclays Capital in New York. "It removes any concerns
about potential adverse terms or the possibility of the program
being eliminated."
The inclusion of legacy securities is likely to benefit the
holders of super senior CMBS bonds, typically large institutions
such as life insurance companies, banks, pension funds and
companies like Fannie Mae (FNM) and Freddie Mac (FRE).
While Wall Street banks packaged and sold these securities, they
typically held the AA to BBB- portions of the deal, said Frank
Innaurato, managing director of CMBS Analytical Services at
Realpoint LLC in Horsham, Pa.
As prices on these bonds tighten, investors in these bonds are
expected to benefit, with most opting to hold on to these bonds
rather than sell them.
The Fed has also specified it retains the right to reject any
CMBS based on its risk assessment. While this introduces some
uncertainty over the specific super-duper bonds the Fed might
eventually accept, it "seems like a necessary requirement for the
Fed to become comfortable with the risk it is taking," say Citi
analysts in a note.
While they may not see much credit risk in the top-rated portion
of the bonds, they included this feature "should economic
conditions deteriorate further" or if they extend the program to
include lower rated portions of the bonds.
The commercial mortgage bond derivative index, the Markit CMBX
AAA 5, rose about five points to 82 cents on the dollar, Wulf said,
noting that on Tuesday, people were trading past the close.
"CMBX volatility has been off the charts while cash CMBS has
continued to enjoy steady, broad-based demand from investors," said
Wulf.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;
anusha.shrivastava@dowjones.com
(Prabha Natarajan contributed to this report)