CMBS defy doubters in busiest month since 2007

, Bloomberg


Bond buyers are devouring the most commercial-mortgage debt linked to everything from skyscrapers to Hawaiian resorts in more than five years, allaying concern that an onslaught of sales would be too much to digest.

Even as Bank of America Corp. estimates sales of the securities more than doubled to $10.7 billion this month, investors have pushed down the rate on the top-ranked portion of transactions maturing in 10 years to 0.72 percentage point above the benchmark swap rate of 2.06 percent. That difference is the narrowest since issuance revived in 2009.

Buyers are seeking commercial-mortgage bonds after property values recovered 45 percent since bottoming in December 2009 and as the Federal Reserve holds interest rates at almost zero into a fifth year. They're defying some investors' expectations that the rush of offerings could lead to a logjam, according to Ellington Management Group 's Leo Huang.

"Investors still have their buying hats on," said Huang, an investment manager overseeing commercial real-estate debt at the Old Greenwich, Connecticut-based firm founded by Michael Vranos in 1994. "The market is holding up to the supply much better than it has in the past couple of years."

JPMorgan Chase & Co. and Deutsche Bank are selling $2.5 billion in bonds linked to the 2010 buyout of Extended Stay Inc., the largest offering since 2007. This month's sales are the most since November of that year, when a record $232 billion was offered, according to data compiled by Bloomberg.

'Bacchanalian Syndication'

Sales are rising after the market shut down when credit markets froze in 2008. Issuance is forecast to increase by more than 50 percent to as much as $70 billion in 2013, according to Credit Suisse Group.

The banks already sold about $500 million of the securities backed by so-called mezzanine debt, which gets paid after the first mortgage and offers buyers higher yields. The lenders last week sold a $245 million slice of the mezzanine portion to pay 559 basis points more than the benchmark swap rate, after marketing the securities to yield 578 basis points, according to people familiar with the offering who asked not to be identified because terms aren't public.

"At 15 times oversubscribed, the mezzanine distribution process was redolent of a bacchanalian 2007 syndication," said Ed Shugrue, chief executive officer of Talmage, who oversees $2 billion of commercial property debt in New York.

Berkshire Bonds

Elsewhere in credit markets, Warren Buffett's Berkshire Hathaway and Netflix led at least $10 billion of corporate bond offerings in the U.S. as sales surpass last January's total. Bank of America cut its outlook for returns on investment-grade bonds. Pharmaceutical Product Development Inc. was said to have cut the rate it will pay on a $1.46 billion covenant-lite term loan.

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, decreased 0.74 basis point to 15.88 basis points. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.

The cost of protecting corporate bonds from default in the U.S. rose for a second day. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, increased 0.4 basis point to a mid-price of 86.3 basis points, according to prices compiled by Bloomberg.

General Electric

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 2.4 to 109. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed one to 110.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Fairfield, Connecticut-based General Electric Co. were the most active dollar-denominated corporate securities Tuesday, accounting for 3.44 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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