The Unsecured Country

Well an interesting development. Seems there is some instability in the Commercial Real Estate Bond market. Recall that just before the near collapse of the residential sub-prime market there was a similar, although slightly less drastic, “correction.” This time, about the past 5 or six years worth of income was wiped out, and we will see if there’s a mad rush out of these vehicles, and if so, some of the commercial real estate lenders get squeezed. Something certainly to watch.

Hat Tip: Sudden Debt

Friday, April 20, 2007

Commercial Real Estate…Again
I will once again focus on commercial real estate and mortgages. While popular attention is currently focused on residential sub-prime and near-prime mortgages, commercial mortgages are also – ever so quietly – crumbling all around us.

The CMBX indexes produced by Markit track the default risk of securities constructed from commercial mortgages (CMBS). Just like the other indexes, CMBX has several tranches rated from BB to AAA. Here are some charts tracking their yield spreads (the higher the spread, the worse the performance).

  • The lowest, “junk” rated BB tranche has zoomed to 412 basis points (4.12%), up sharply from a “reasonable” 160 bp just six months ago.


CMBX-NA-BB 2

What’s interesting here is that it’s not only the junk grade tranches that are being affected:

* But even the super-safe AA tranche is taking a beating, from 8.5 bp to 24 bp.

Such CMBS securities are the second largest sector in structured finance, after residential mortgage bonds (RMBS). According to the Commercial Mortgage Securities Association, CMBS issuance in the US alone reached a record $207 billion in 2006. International issuance is growing too, bringing the total to $302 billion.

So it really isn’t just a US phenomena, but a global issue.

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The Unsecured Country

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