CMBS prices have slowly tightened in the latter part of December 2009 as buyers continue to purchase senior investment grade CMBS that are eligible for financing under the government’s Term Asset-Backed Securities Loan Facility (TALF), which allows CMBS investors to leverage their CMBS returns. In addition, CMBS buyers are purchasing non-TALF-eligible senior and junior investment grade CMBS to achieve the higher returns provided by these bonds. “We are watching the prices of TALF-eligible senior investment grade CMBS securities, primarily from 2005 CMBS issues and earlier, because we believe the prices and yields on these bonds reflect what investors will require in the new issue market for CMBS,” explained Michael Sneden, Executive Vice President of ValueXpress. “We can then forecast the direction of interest rates for new CMBS conduit loans for our clients as we advise them on their financing alternatives.” The tightening of CMBS spreads bodes well for further reduction in interest rates for CMBS conduit borrowers. “We believe CMBS conduit loan spreads will continue to decline in 2010, but we are concerned that the reduction in spreads will be offset by rising Treasury bond yields, thereby limiting the overall reduction in interest rates to CMBS conduit borrowers,” said Sneden. “However, we still believe there will be a net reduction in interest rates to CMBS conduit borrower through the first half of 2010.”
In its 2010 CMBS Outlook, J.P. Morgan said it believes super senior CMBS (senior investment grade at issuance) spreads will compress further in 2010. J.P. Morgan thinks new-issue CMBS will be viewed in a different light versus existing CMBS securities due to tighter underwriting standards and lower overall leverage on the underlying loans that back the CMBS. J.P. Morgan said that newly issued 5-year senior investment grade CMBS (AAA-rated) should price inside of the 5-year swap rate plus 100 basis points. The all-in rate today based on the 5-year swap rate plus 100 basis points approximates 3.85%. This rate is very favorable as it relates to potentially attractive interest rates that can be offered to borrowers.