Commercial Mortgage-Backed Securities: Strong Demand, But Not for WeWork

Liquidity remains strong after the largest post-crisis SASB and CRE-CLO deals.

December 23, 2019


This CMBS sector report is excerpted from the Fourth Quarter 2019 Fixed-Income Outlook.

The CMBS sector continued to enjoy healthy liquidity despite new issue deal sizes growing larger in the third quarter. The largest post-crisis single-asset/single borrower (SASB) deal was issued at a staggering $5.6 billion. The deal was announced and closed in less than one week, showing the strength in demand. The deal creates a new benchmark for the SASB world as there were six co-managers on the deal and each of these dealers is making daily markets on the entire capital stack. Usually, the SASB market is more bespoke, with only a few dealers specializing in certain deals. In CRE-CLO, two transactions priced at over $1 billion, including the largest CRE-CLO issued to date at $1.2 billion. The market received both deals well, with spreads remaining relatively unchanged from previous issuances. As a result of the success of these larger transactions, we expect the average CRE-CLO pool size to continue to grow in 2020.

Average CRE-CLO Pool Size Should Continue to Grow in 2020

CRE-CLO Average Pool Size by Year

In CRE-CLO, two transactions priced at over $1 billion, including the largest CRE-CLO issued to date at $1.2 billion. The market received both deals well, with spreads remaining relatively unchanged from previous issuances. As a result of the success of these larger transactions, we expect the average CRE-CLO pool size to continue to grow next year.

Average CRE-CLO Pool Size Should Continue to Grow in 2020

Source: Guggenheim Investments, Wells Fargo. Data as of 9.30.2019.

Lastly, conduit liquidity remains strong, with as many as 10–15 dealers actively bidding on investment-grade bid lists.

The CMBS world was focused on WeWork’s IPO withdrawal, its halting growth, and its cost cutting efforts, leading to speculation of potential defaults on their debt obligations and lease payments. A large portion of WeWork’s portfolio is in New York, specifically midtown Manhattan.

A Contraction in WeWork's Manhattan Portfolio Could Trigger Higher Cap Rates

WeWork's Manhattan Portfolio

A large portion of WeWork’s portfolio is in New York, specifically midtown Manhattan. If WeWork needed to reduce its occupied space, Midtown office rents could decline, and cap rates could rise.

A Contraction in WeWork's Manhattan Portfolio Could Trigger Higher Cap Rates

Source: Guggenheim Investments, Morgan Stanley. Data as of 9.30.2019.

If WeWork needed to reduce its occupied space, Midtown office rents could decline, and cap rates could rise. We have consistently maintained a bearish view on WeWork due to its business model of mismatching short-term assets with long-term liabilities. Additionally, the diversification in conduit bonds means that no one obligor can have a large impact to the overall transaction. The credit enhancement of investment-grade bonds provides additional protection from losses on any one loan.

While secondary liquidity is stable and credit metrics have remained relatively unchanged in new issue deals, we continue to be cautious about investing in conduit transactions as spreads are close to post crisis tights and bonds could underperform if we were to head into a recession.

—Shannon Erdmann, Director; Phil Hoehn, Vice President

 
Important Notices and Disclosures

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. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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