August 17, 2016
Uncertainty surrounding a potential 2016 recession and anticipation of the Brexit vote choked off new issue CMBS supply and kept the CMBS credit curve historically steep in the first half of 2016. Despite causing a brief swoon in risk assets, however, the Brexit vote marked a positive turning point in the CMBS market. Since July 1, new issuance volumes have surged, and spreads on CMBS bonds have tightened across the rating spectrum. The positive market tone has also been buttressed by higher quality conduit transactions and the market’s first-ever risk retention transaction. Recent deals, featuring bank-only origination (due in part to the closures/layoffs in smaller shops during the first quarter) and more conservative debt underwriting metrics, have been well-received by the market. In the risk-retention transaction, the underwriter’s agreement to retain 5 percent of the deal and the transaction’s otherwise strong credit metrics were rewarded with extraordinarily strong investor demand. Ultimately, that deal’s success was marked with the tightest new issue execution of the year, and reset secondary CMBS markets even tighter.
While credit-sensitive CMBS bonds underperformed in the first half of 2016, they have rallied sharply in the first weeks of the third quarter. Since July 1, BBB- spreads have narrowed approximately 200 basis points and new issuance volumes have surged.
Source: Wells Fargo Securities, Guggenheim Investments. Data as of 8.5.2016.
Post-crisis CMBS, as measured by the Barclays U.S. CMBS 2.0 index, posted a positive total return of 2.6 percent for the second quarter. All credit tranches posted strong returns for the quarter, with AAA-rated, AA-rated, A-rated, and BBB-rated CMBS 2.0 posting positive total returns of 2.6 percent, 3.5 percent, 2.3 percent, and 1.3 percent, respectively.
Even with the CMBS rally, our evolving views on property fundamentals, multifamily underwriting standards, and energy markets have caused us to become increasingly selective. Troubles in retail commercial properties are well known, but recent data suggest hotel performance may have reached a plateau. Additionally, despite favorable demographic trends in apartment housing, we have become cautious about Freddie Mac and Fannie Mae’s voracious appetite to finance class B and C multifamily properties. Finally, office vacancies in energy markets such as Houston are beginning to spike as the ongoing downturn in oil prices takes its toll on industry participants.
Market volatility in the first half of the year sharply curtailed new issue activity. Private-label CMBS new issuance is roughly half what it was in the same period last year. New issuance volume is recovering in the third quarter, however, with four deals announced in the first few weeks.
Source: Trepp, Guggenheim Investments. Data as of 6.30.2016.
—Peter Van Gelderen, Managing Director; Shannon Erdmann, Vice President; Simon Deery, Vice President
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment-grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating-rate senior-secured syndicated bank loans and other floating-rate securities involve special types of risks, including credit risk, interest-rate risk, liquidity risk and prepayment risk.
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