ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access CMBS Market Watch Weekly Securitized Products Americas Market activity and relative value After snapping tighter over the prior two weeks, legacy CMBS spreads saw limited movement over the past week. While retail demand still seemed reasonably strong, there was an uptick in bid lists, especially within the AJ sector. At the same time, it would appear that dealers’ balance sheets have gotten a little heavier within private label CMBS. We still believe that the sector offers good relative value and could tighten further before the end of the year. However, after the rapid spread tightening following the end of the debt ceiling debate, we think a period of consolidation is healthy for the market. Sears evaluates more store closures On Tuesday, Sears Holdings Corporation announced that it will evaluate closing additional stores, potentially as leases roll. While we work on digging into the CMBS exposure in detail, we thought it would be useful to do an initial search for loans where Sears or Kmart was identified as a top-three tenant and where the lease appears set to expire. We also review the status of loans that had exposure to the sale of Sears pads as well as the loans that were exposed to the store closures announced in early 2012. Loans in the news The potential sale of a stake in One World Wide Plaza has been delayed by a lawsuit. We also discuss Kimco buying a portfolio that accounts for a large percentage of a 2012 transaction as well as the sale of a multifamily property that backs a Freddie K deal. Refinance risk in 2014 maturities and beyond One of the big drivers of increased delinquencies in the first half of 2012 was the large number of loans that were reaching maturity. However, over the past year, maturing loans have been less problematic. In this section, we reapply a tool we introduced in the past that looks at past successful refinances, based on DSCR and debt yield, to help predict future loan payoffs. The simplified analysis leads us to conclude that 2014 maturities should not be problematic and that 2016/2017 maturities may see rates of refinancing above consensus even if interest rates shift higher. Research Analysts Roger Lehman +1 212 325 2123 [email protected]Serif Ustun, CFA +1 212 538 4582 [email protected]Sylvain Jousseaume, CFA +1 212 325 1356 [email protected]CMBS and CMBX spreads and prices CMBS swap spread/price 1-wk chg Trailing 12-month 10/29/13 Min Max Avg AAA 10yr 114 -1 70 128 97 GG10 A4 165 -2 116 173 147 AM 205 0 110 260 197 AJ 560 -15 420 775 598 AA 10yr ($) 56 0 50 62 55 A 10yr ($) 30 0 28 30 30 BBB- 10yr ($) 11 0 11 11 11 New issue CMBS AAA 5yr (30% CE) 72 -1 42 80 57 AAA 10yr (30% CE) 93 -2 70 121 90 AAA Junior 120 -6 95 170 124 AA 170 -5 130 225 166 A 230 -10 167 260 220 BBB- 380 -15 292 490 383 CMBX.3 AAA 97.3 0.2 93.0 98.2 96.3 AM 92.9 0.4 83.8 94.4 90.0 AJ 75.4 0.8 62.4 79.7 71.0 BBB 7.5 -0.1 7.5 9.1 8.3 BBB- 6.5 -0.1 6.5 7.6 7.1 Agency CMBS GNR 10yr 140 0 70 140 95 FNA 10yr 67 -4 43 77 56 FREMF 10yr 62 -3 41 75 54 SBA 504 10yr 51 -2 13 53 28 Source: Credit Suisse, Markit 30 October 2013 Fixed Income Research http://www.credit-suisse.com/researchandanalytics FOR INSTITUTIONAL CLIENT USE ONLY
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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR
OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Market activity and relative value After snapping tighter over the prior two weeks, legacy CMBS spreads saw limited
movement over the past week. While retail demand still seemed reasonably strong, there
was an uptick in bid lists, especially within the AJ sector. At the same time, it would appear
from TRACE data and the New York Fed’s report that dealers’ balance sheets have gotten
a little heavier within private label CMBS.
Some of this may be attributable to the continued supply of A1A bid lists. The visible
supply last week totaled an additional $1.4 billion, but given the reported transactions on
TRACE (Exhibit 1) it appears that additional bonds could have traded on the follow.
Exhibit 1: TRACE trading volume
0
1,000
2,000
3,000
4,000
5,000
6,000
10/3
0/1
3
10/1
6/1
3
10/1
/13
9/1
7/1
3
9/3
/13
8/1
9/1
3
8/5
/13
7/2
2/1
3
7/8
/13
6/2
1/1
3
6/7
/13
CMBS Daily Volume
5-Day Average Trading Volume
$million
Source: Credit Suisse, FINRA
Despite the supply, spreads in the A1A sector, and in fact generally across the legacy
curve, were close to unchanged. Over the same period, corporate spreads were a touch
wider (judging by both the IG and HY CDX indices), so CMBS did not lose any ground on
a relative basis.
We still believe that the sector offers good relative value and could tighten further before
the end of the year. However, after the rapid spread tightening following the end of the
debt ceiling debate, we believe a period of consolidation is healthy for the market.
We also believe that further spread tightening is predicated on the lack of any large
surprises. Volatility, as we discussed last week, has come down meaningfully, and we
view this trend as a large positive for spreads. While the consensus remains for the Fed to
hold off on tapering into next year, today’s Fed announcement that it was not altering its
bond buying program was a positive for the market.
Within the legacy sector, we still believe the wider-trading AMs have tremendous value,
even after their recent move tighter. We also continue to believe that some of the A1As
are very cheap from a relative standpoint compared to other short-duration assets.
However, as we have warned throughout the last year, these premium bonds need to be
looked at carefully given the risk of cash flow acceleration, but we argue there are still
opportunities, especially in some of the wider trading names.
We have also noted, over the past few weeks, that select, mid-tier AJs should tighten.
While we still believe this view will be true over the intermediate term, there may be a
temporary pause in that trend as new supply comes to market and the Street digests what
has been sold.
30 October 2013
CMBS Market Watch Weekly 3
While legacy spreads have been relatively static, new issue spreads tightened further
over the past week. The super-senior, last cash flow bonds are approximately 5 bp
tighter, while triple-B minus bonds are in around 15 bp. The credit curve has also
continued to flatten.
Year-to-date, we have seen nearly $44 billion in conduit issuance and two deals, WFRBS
2013-C17 and GSMS 2013-GC16, are now in the market. We have generally liked the
new issue market and especially the super-seniors (which we view as cheap to
corporates) and single- and double-A mezzanine tranches. We recognized that we were
giving up some potential upside by avoiding triple-B minus bonds (in an environment
where flattening seemed likely) but still preferred the risk/reward trade-off of being slightly
higher up the stack.
Despite the strong reception of the past few new issue deals, we have some concerns
about the impending supply as we head into the final stretch of the year (with many
holiday-shortened weeks). There appear to be as many as nine conduit deals on the
docket ($11 billion in total) that could come before the end of the year. In addition, there
are several single-borrower transactions in the queue. While some deals may slip into next
year, such supply could potentially start to weigh on the market.
Given this outlook, we still believe our preference for super-seniors and single-As within
new issue makes sense.
On the Agency CMBS side, we have seen spreads firm up, but they have lagged the
tightening noted on the private label side over the past few weeks. The dip in yields and
the firming up of spreads have also served to increase borrower demand for financing for
multifamily borrowing.
Sears evaluates more store closures On Tuesday, October 29, Sears Holdings Corporation pre-announced results for the third
quarter (ending November 2) as well as a number of corporate actions aimed at improving
its financial flexibility.
Most relevant for the CMBS market, Sears revealed it will “review each location, including
leased locations that are set to expire, and decide whether or not to renew such leases.”
As we discuss further below, the company has already shrunk its store base, and given its
latest earnings, further shrinkage should not come as a surprise. The third quarter
guidance was negative $250 million to $300 million of adjusted EBITDA.
We do not believe there will be any great near-term impairment across the CMBS sector
from Sears’ ongoing store closures, although some individual loans may be adversely
affected. However, we take this as another sign that retail operations in the United States
are facing ongoing challenges and will continue to evolve over the coming years.
Sears Holdings is the parent company for both Sears and Kmart stores, which merged in
2005. It operated 2,036 full-line and specialty retail locations in the United States as of the
end of its 2Q reporting period. In addition, it operates locations in Canada through a 51%
owned subsidiary (part of the company’s announcement this week indicated the sale of
five store leases in Canada).
We show the breakdown of stores, over time, in Exhibit 2. The full-line Sears stores
average 136k square feet. Most of the Kmart stores are classified by the company as
“discount stores, averaging 98k square feet." It also had, as of August, 25 Kmart Super
Centers, which are slightly larger (averaging 168k square feet). The company has already
eliminated nearly 10% of its stores over the past three years, with almost 2% of those
eliminations coming in the first half of this year.
30 October 2013
CMBS Market Watch Weekly 4
Exhibit 2: Total US-based Kmart and Sears stores (adjusted *)
Period Kmart Sears Full-line Sears Specialty * Total
Q2 2013 1,195 791 50 2,036
Q1 2013 1,211 798 53 2,062
YE 2012 1,221 798 54 2,073
YE 2011 1,305 867 65 2,237
YE 2010 1,307 894 60 2,261
* We have excluded Sears Hometown and Outlet stores from the 2010 and 2011 totals. The company completed separation from those businesses back in October 2012. The remaining specialty stores are a mixture of freestanding Sears Auto Centers and Land’s End Stores – the two business Sears announced it was evaluating and potentially might separate from Sears Holdings. Source: Credit Suisse, company filings
Many of the store closures occurred during 2012. At the end of 2011 the company
announced it was planning to close between 100 and 200 Kmart and Sears locations. We
discussed the CMBS exposure to the partial list of locations of stores slated to be closed that
the company provided in January 2012 and February 2012. We ultimately found 33 loans
exposed to the list of confirmed closures. We thought it interesting to see how those loans
have fared and summarize what happened to them in Exhibit 3, at the end of this section.
In preparation for further closures of Kmart and Sears stores, we plan to do a deep dive
into the CMBS-related exposure (as we did with our series of write-ups on JC Penney).
However, doing this thoroughly and accurately is a very manually intensive exercise. One
cannot just rely on the listed top three tenants in the CMBS deals, as often there is
exposure to a shadow anchor that is not part of the collateral. In addition, stores open and
close over time and the tenant data is often not well reported or maintained.
While we work on digging into the exposure in detail, we thought it would be useful to do
an initial search for loans where Sears or Kmart was identified as a top three tenant, at
least as of securitization, and where the lease appears set to expire over the next year (we
picked the end of 2014 as a cutoff). Given the company’s statement, properties with near-
term lease renewals seem to be the most at risk of closure if there is an underperforming
Sears or Kmart location. We show this exposure in Exhibit 4 at the end of this section.
It is possible we will see closures of other locations, but we believe given the company’s
statement that this is less likely. The company could offer to sell some of its owned
locations or (less likely) just vacate them. In fact, in February 2012, the company
announced the sale of 11 owned pads to General Growth Properties. Four of the eleven
stores were located in malls that were collateral for loans in CMBS, with the Sears location
part of the collateral in only two of them. We show these loans (and what happened to
them) in Exhibit 3. Three of the loans paid off with no loss. One property, West Oaks Mall,
in Ocoee, Florida, suffered a hefty 66% loss severity.
The company also has the option of closing a store prior to its lease termination. A dark
anchor, even if it were paying rent, would be detrimental to a loan’s credit quality. Some
examples of this, such as Victorian Square in JPMCC 2006-LDP7, can be seen in Exhibit 3.
More likely, however, we believe the company would negotiate a lease termination with the
landlord, which could prove to be a positive for the mall’s performance.
In Exhibit 3 we also list the loans that had exposure to the sale of Sears pads as well as
the loans that were exposed to the store closures announced in early 2012. Many loans
wound up paying off in full or continued to perform, but more often the loan either took a
loss or is delinquent today.
However, it is worth noting that many of these were already problematic loans, where the
property was experiencing problems prior to the announced closure. This was a point we
made with JC Penney exposure in CMBS. Underperforming stores are likely to be found in
underperforming locations. As a result while a store closure can be detrimental, it less
often will turn a strong mall into a weak mall and more often just further impair the
performance of an already underperforming location. On the flip side, the departure of an
underperforming store at a strong mall can prove to be a positive.
Exhibit 3: Status loans affected by 2012 closures and sale of pads
CMBS exposure related to sale of pads to GGP
Deal Loan City, State Original
Bal ($mn) Loan
Status Notes
BSCMS 2007-PW18 GGP Portfolio – Marketplace Shopping Center
Champaign, IL 156.0 Paid Off Portfolio loan paid off with no loss
CD 2006-CD3 Ala Moana Center Honolulu, HI 300.0 Paid Off Refinanced in a standalone deal in 2012 (GSMS 2012-ALOH) CD 2007-CD4 404.0 Paid Off
CGCMT 2006-C5 211.0 Paid Off
CGCMT 2007-C6 100.0 Paid Off
CWCI 2006-C1 225.0 Paid Off
CWCI 2007-C2 100.0 Paid Off
CSFB 2005-C6 Fashion Place Murray, UT 151.7 Paid Off 1% loss – refinanced in a standalone deal (BBUBS 2012-TFT)
WBCMT 2003-C9 West Oaks Mall Ocoee, FL 75.9 Liquidated 66% loss severity – went delinquent after closure announced
CMBS exposure to 2012 store closings BACM 2005-6 Island Walk Shopping Center Fernandina Beach,
FL 11.5 Perform/
Watchlist Performance suffered since closure announced
BACM 2006-4 Gratiot Crossing Chesterfield, MI 13.5 REO Loan was not in special when closure announced. Became REO in Oct 2012. Occupancy dropped to 37%
CD 2005-CD1 Great Indoors – Sears – Alpha Rd Farmers Branch, TX 16.1 Current Sears converted from Great Indoors to an Outlet Store
CD 2007-CD4 Broomfield Plaza Shopping Center Broomfield, CO 9.5 Perform/ Watchlist
Added to the watchlist after closure announced
CSFB 2002-CKN2 Crystal River Mall Crystal River, FL 16.1 Liquidated 72% Severity – was 90+ delinquent well before closure announced
CWCI 2006-C1 Kandi Mall Willmar, MN 14.8 Perform Past its September 2011 ARD date
Borrower states any tenants with early termination rights or co-tenancy clauses tied to Kmart are either exercising them or using them to exact lease concessions.
GMACC 2004-C2 Military Circle Mall Norfolk, VA 61.2 Special Sears vacated – borrower was trying to buy out lease
GMACC 2004-C2 Shoppes at St. Lucie West Port St. Lucie, FL 16.8 Paid off Sears vacated & paid rent. Paid off with Yield Maintenance
JPMCC 2006-CB15 Lightstone Portfolio – Bradley Square Cleveland, TN 73.9 Liquidated 77% loss severity. Multi property loan was REO before store closure announced
MEZZ 2006-C4 Lightstone Portfolio – Bradley Square Cleveland, TN 4.0 Liquidated 100% loss severity. Multi property loan was REO before closure announced MEZZ 2007-C5 3.0
JPMCC 2006-LDP7 Victorian Square Midlothian, VA 12.2 Perform/ Watchlist
Big drop in occupancy since 2012 notes indicate "This property has been devastated by K-Mart not renewing the lease"
JPMCC 2007-CB18 Golden East Crossing Rocky Mount, NC 49.0 90+day, Modified
Had been in special before closure announced
MEZZ 2007-C5 Golden East Crossing Rocky Mount, NC 3.1 90+day, Special
Had been in special before closure announced
LBUBS 2003-C3 Polaris Fashion Place Columbus, OH 125.0 Paid Off No Loss
LBUBS 2007-C6 PECO Portfolio – Westdale Plaza Baraboo, WI
323.9 90+day, Special
Westdale Plaza is part of the 37 property portfolio loan.
MLCFC 2007-9 8585 South Yosemite Street Lone Tree, CO 25.5 Perform Sears converted from Great Indoors to an Outlet Store. 100% Occupied as of YE 2012
MSC 2005-IQ10 69th Street Philadelphia Upper Darby, PA 65.0 Liquidated 49% loss severity. First went delinquent right before closure announced
MSC 2005-T17 Coventry Mall Pottstown, PA 76.5 FCL Special servicing prior to announced store closure. Modified in late 2011 with A/B note split with a two-year maturity extension. Became REO last month.
On watchlist before announced closure. Middlesboro Mall store is closed but Sears in Mercer Mall is still open. All three properties in the portfolio are 85% to 90% occupied.
MSC 2007-IQ16 Ashtabula Mall Ashtabula, OH 40.3 REO The loan was 90+-days delinq before Sears closure was announced. The property is 58% occupied as of 2013 H1. Kmart store in Ashtabula Mall is still open.
WBCMT 2007-C30 Eastland Center Harper Woods, MI 39.5 Current The property was 89% occupied as of 1H 2013.
CSFB 2001-CKN5 Manhattan Plaza Toledo, OH 4.8 Liquidated 68% Loss severity. Loan transferred to Special for maturity default before announced store closure
Amounts shown in billions of dollars are actual origination numbers. The bars reflect the varying levels of the index. Source: Credit Suisse, Mortgage Bankers Association
30 October 2013
CMBS Market Watch Weekly 10
While the availability of financing continues to improve, there is concern that rising interest
rates could negatively impact the commercial real estate and CMBS markets. As we have
discussed in the past, higher interest rates could lead to higher cap rate rates and a
commensurate drop in commercial real estate prices. Our view is that there is a possibility
that cap rates will rise slightly over the coming quarters, but any move should be far less
than the one-for-one moves suggested by a change in Treasury rates and should not be
very detrimental to commercial real estate prices.
The other concern is that higher commercial mortgage lending rates will make it more
difficult for loans to refinance. This is true for both new issue and legacy loans. While we
believe the historically low rate environment may ultimately lead to extension risk on newly
issued mortgages, this will not present itself on the vast majority of more recently issued
deals for nine or ten years.
Legacy loans, on the other hand, scheduled to mature over the next few years, will be
relatively more sensitive to changes in borrowing rates and less influenced by changes in
other factors, such as property level cash flows, inflation, and real estate price
appreciation, which could potentially counterbalance a rise in rates.
With this in mind, we revisit the upcoming legacy maturities in 2014 and beyond. The
ability for maturing loans to pay off on time affects many aspects of CMBS relative value.
Last year our outlook for maturing loans, coupled with our view for a continued high
resolution rate for problem loans, drove us to be wary of premium super-senior securities.
2013 maturities had a reasonably high success rate
For 2013, we estimated that there were $32.6 billion of non-defeased conduit loans that
were scheduled to mature over the calendar year as of October 20121. We present the
pay-off rate, so far, for the $25.6 billion conduit loans that were scheduled to mature in
the first ten months of the year in Exhibit 6. We have excluded from this table
November’s and December’s maturities, but already more than 50% of those loans have
prepaid as well.
Exhibit 6: Status of 2013 maturities by loan term through October’s remits
5-Yr Term 7-Yr Term 10+-Term Total
Prepaid 65.5% 52.0% 56.2% 56.2%
Paid At Maturity 5.4% 14.8% 27.1% 24.4%
Paid Post Maturity 7.2% 2.8% 8.0% 7.3%
Total Paid 78.1% 69.6% 91.3% 87.8%
Liquidated 2.5% 2.0% 1.4% 1.6%
Extended 16.1% 5.6% 1.0% 2.4%
Outstanding Post Maturity 3.3% 22.7% 6.2% 8.2%
Total Not Paid 21.9% 30.4% 8.7% 12.2%
Source: Credit Suisse, Trepp
The pay-off success rate is nearly 88% for this set of loans and is likely to edge higher in
the coming months as many loans in the “outstanding post maturity” category are
resolved. By contrast, at the same point last year, the 2012 maturities had only a 70%
success rate. While some of this was driven down by a much bigger and less successful
5-year bucket (54%), the 10-year maturity category was lower too (86%).
1 We define the coming year maturities as of October of the prior year to account better for the loans that were scheduled to mature
in the early part of the year (like January) but paid off in the months prior to their maturity date. Defining the universe as of January would have eliminated these loans and biased the pay-off percentage lower.
30 October 2013
CMBS Market Watch Weekly 11
For the loans that paid off, most did so prior to, or at, their maturity, but an additional 7% of
loans that came due paid off in the months following their due date, with loans maturing
earlier in the year having more time to do so.
There was also 12% of the universe that failed to pay off. Most of these loans remain
outstanding and have not yet been officially extended. Over time, they will either receive
an extension, pay off post their maturity, or be liquidated.
Interestingly, there was over $3.7 billion of loans from the 2006 to 2008 vintages
scheduled to mature in the first ten months 2013. Of these 74% successfully paid off.
Interest rates have started to rise
As rates started to rise mid-year, we noted that in looking at the credit indicators, one of
the first places we may see any negative impact is on the refinancing rate. So far, despite
the increase, the pace of maturing loans refinancing does not seem to have slowed. In
fact, loans set to mature in the first six months of the year had a slightly lower pay-off
success rate (87.4%) than loans that came due in the next four months (88.4%), despite
the former having more time to pay off post maturity.
Nevertheless, there has been a meaningful rise in conduit lending rates over the past few
months. In Exhibit 7, we show the 90-day moving average mortgage rate, weighted by
loan size, on newly originated conduit loans (the red line).
Conduit interest rates fell consistently from January 2012 to May 2013. However, rates
rose approximately 100 bp over the next four months. We cut off the data in September
due to a declining sample size.
There appears to be a strong (negative relationship) between the level of rates and
origination volumes, and as rates rose in the third quarter, the average daily conduit
volume appears to have fallen. At this point it is too early to say if this was due to higher
lending rates or other factors (such as concern over the government shutdown and the
debt ceiling). Additionally, we note that this only measures origination volumes of
mortgages that back deals that have priced. We may see more August and September
originated loans come to market in deals brought over the next few weeks.
Of course, as the above statement reminds us, there are many other factors that can
impact both origination volumes and lending rates. Nevertheless, we believe that, at least
at the moment, the level of rates is an influential factor and the quick rise in interest rates
is likely to lead to a relative decline in origination volumes, at least over the near term.
Exhibit 7: 90-day average conduit origination and coupon estimates
0
20
40
60
80
100
120
140
160
1804.0
4.5
5.0
5.5
6.0
6.5
Oct-
11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-12
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
De
c-1
2
Jan
-13
Fe
b-1
3
Ma
r-1
3
Ap
r-13
Ma
y-1
3
Jun
-13
Jul-
13
Au
g-1
3
Se
p-1
3
Coupon for 10-year loans
Average daily origination
$mn% rate
Note: The origination coupon rate is for 10-year conduit loans with an LTV greater or equal to 65%. Source: Credit Suisse, Trepp
30 October 2013
CMBS Market Watch Weekly 12
What is scheduled to mature
We estimate that across the CMBS universe there is currently $47 billion of non-defeased
loans scheduled to mature in 2014 (Exhibit 8). This includes not only $36.9 billion of conduit
loans but, in addition, $4.5 billion of floaters and $6.0 billion of single-borrower transactions.
Not included in the 2014 number is the $19 billion of loans that were set to mature in 2013,
or before, that are past their maturity date (and have not been officially extended). There is
also about $19.0 billion in defeased vintage conduit loans (not included in the above
statistics) that should not present any problems paying off.
Exhibit 8: Maturity profile by deal type Exhibit 9: Maturity profile by vintage type
0
20
40
60
80
100
120
140Single Borrower
Floater
Conduit/Fusion
$bn
19
47
89
127131
12 9 12 19
34 39
1 5 0 2
0
20
40
60
80
100
120
140New vintage(2009+)
Vintage (Pre-2009)
$bn
19
47
89
127131
12 9 12 19
34 39
1 5 0 2
* 2013 maturities and past due loans. Source: Credit Suisse
* 2013 maturities and past due loans. Source: Credit Suisse
The 2014 total is higher than the past year’s maturing loan total. Over the next several
years we see the amount increase, peaking in 2016 and 2017.
It is also interesting to look at how these totals have changed since last year. The 2014
and 2015 maturities have dropped between $9 to $10 billion, for each vintage, versus last
year’s estimate. This is a significant change. The reduction has been slightly smaller for
the 2016 and 2017 maturity totals, down $7 billion and $4 billion, respectively. The overall
decline can be attributed to prepayments, defeasance, and the liquidation of problem loans.
It is also worth noting that about 6.5% of the maturities over the next four years is
comprised of post-crisis originated loans (Exhibit 9). The percentage runs between 5.2%
and 6.7% each year. Then starting in 2018, the majority of maturities come from these
2010 and later vintages.
Our approach to estimating refinance risk
We have, over the past two years, developed and enhanced a rubric to help estimate the
pay-off rate for upcoming maturities based on what was able to be successfully refinanced
over the prior year.
In our approach, we have assigned each of the loans that was scheduled to mature over our
sample time period from the 2013 maturity to a group based on two credit characteristics:
its debt yield and what we call the “anticipated” DSCR. In both cases, to estimate these,
we considered the last reported net cash flow as an estimator of future cash flows.
The “anticipated” DSCR is based on the last reported cash flow and an estimated debt
service payment. The estimated debt service payment is calculated assuming the existing
mortgage is refinanced into a new, 10-year term, 30-year amortizing loan at the mortgage
rate that prevailed at the time of the loan’s pay-off (as shown Exhibit 7), varying the
refinancing rate based on market rates.
30 October 2013
CMBS Market Watch Weekly 13
Once bucketed, we then calculated the probability of pay-off for each of these groups,
based on the success rate of the past year’s maturities in that cohort. For example, for a
performing loan that had an “anticipated” DSCR between 1.5x and 1.6x and a debt yield in
the range of 9% to 10%, we calculated a 90% probability of refinancing. But a performing
loan, with the same debt yield and a DSCR between 1.0x and 1.1x, only had a 75%
probability of paying off. Non-performing loans were given separate treatment, generally
resulting in low pay-off rates.
To come up with this matrix, we analyzed CMBS conduit loans that were scheduled to
mature over the first ten months of 2013. Although going back further in time would have
provided a larger data set, it also would have encompassed a period that was less
representative of the current commercial mortgage financing environment.
While we acknowledge that this methodology is simplistic and does not take into account
each mortgage’s individual characteristics, we believe it is an adequate starting point for
estimating the sensitivity of pay-off rates across the aggregated CMBS universe.
Refinance rate estimates and sensitivity to rate moves
As a final step, we applied this matrix of calculated refinancing probabilities to each of the
upcoming conduit maturities across legacy CMBS, based on the DSCR/debt yield bucket it
fell into. To start, we assumed that the current CMBS loan rate is 5.5% ‒ this is a little
higher than where we have seen the most recent conduit origination levels.
For the 2014 conduit maturities, this gives us an overall pay-off success rate of 83%. By
way of comparison, it is a little lower than the 88% rate for the 2013 maturities we noted
above. If we expand this analysis for the legacy maturities from 2014 to 2017, the
projected refinance rate falls to 77%.
Exhibit 10: Base case refinance rates and sensitivity to rate moves by maturity
Maturity Balance ($mn)
Average Coupon (%)
Rates down 50 bp 5.00%
Rates Unchanged
5.50%
Rates up 50 bp 6.00%
Rates up 100 bp 6.50%
Rates up 150 bp 7.00%
2013 * 1,776 6.0 67.6% 66.9% 66.0% 65.1% 64.1%
2014 36,226 5.6 84.4% 83.4% 82.2% 81.1% 80.0%
2015 82,366 5.4 83.1% 81.9% 80.6% 79.3% 78.0%
2016 117,035 5.9 76.8% 75.5% 74.2% 72.9% 71.6%
2017+ 140,933 5.8 75.4% 74.1% 72.8% 71.5% 70.3%
Total 378,336 5.7 78.3% 77.1% 75.8% 74.5% 73.3%
* Only the remaining maturities in December 2013 were included. Outstanding matured loans were excluded. Source: Credit Suisse, Trepp
The exhibit shows that the later maturity years have generally lower estimated refinance
success rates, falling from 83% in 2014 to 74% in 2017’s (and later) maturities.
These estimated pay-off rates are slightly better than what we estimated a year ago
despite being in a higher rate environment. We attribute part of that to using the 2013 pay-
off experience (which has proved better than 2012). In addition, the refinance rates likely
got a small boost as a result of the declining percentage of outstanding delinquent loans
since we assume these loans automatically will not be able to refinance (except for 30 day
and performing matured, for which we consider a portion will pay off).
To get an idea of sensitivities to interest rates, we then repeated this estimation process
but varied the assumed rate of the new CMBS loan, up and down, in 50 bp increments.
We show the resulting estimates for the entire universe in Exhibit 10.
30 October 2013
CMBS Market Watch Weekly 14
So, for example, if the prevailing mortgage rate were to rise by 50 bp to 6.0%, we
estimate the successful refinance rate across the conduit universe would decline but
only by about 1%, to 75.8%. For small moves in the interest rate, the refinance rate is
less sensitive than we would have initially thought. Of course, any rate move will likely
also see other aspects of the lending environment change, including property values,
availability of financing, and leverage. We have not attempted to capture these other
potential changes in our simplified model.
Lastly, we looked at the estimated pay-off rate by vintage. Not surprisingly, as one goes
from the 2005 to the 2007 vintage, the expected pay-off rate falls. However, even in the
base case, we expect about 71% of the 2007 vintage will be able to refinance successfully
if borrowing conditions remain static.
Exhibit 11: Base case refinance rates and sensitivity to rate moves by vintage
JP Morgan (Aventura Mall) Single Borrower Fixed 1,200
Wells Fargo, RBS Multiple Borrower Fixed 1,100
Announced Total 18,068
Source: Credit Suisse, Commercial Mortgage Alert, Commercial Real Estate Direct
Exhibit 13: 2013 CMBS issuance (in $ millions)
Month
Multi-
Borrower
Floating
Rate
Single
Borrower Other
2013
US Total
2013
Non-US Total
2013
Global Total
US Agency
CMBS*
US Resecur./
CDO
January 5,182 0 3,120 0 8,302 0 8,302 5,789 177
February 4,117 0 2,987 0 7,104 1,023 8,126 5,693 459
March 2,510 0 3,673 484 6,666 1,460 8,126 7,424 0
April 5,592 505 1,560 109 7,766 0 7,766 7,973 73
May 3,983 0 1,959 57 5,999 1,414 7,413 8,152 0
June 5,173 0 775 0 5,948 3,514 9,462 5,051 0
July 4,037 135 800 219 5,190 403 5,593 6,213 0
August 5,365 0 1,060 825 7,249 271 7,521 3,441 0
September 3,239 0 425 186 3,850 386 4,236 5,381 406
October 4,935 0 1,435 147 6,517 0 6,517 4,789 0
Total 44,133 640 17,793 1,878 64,443 8,471 72,914 58,081 1,115
* Multiple-pool Agency CMBS transactions only (i.e. deal tickers with GNR, FREMF, FNA, GEMS, MFMEG, SBAP and SBIC). Standalone DUS MBS and GN MBS pools are not included. Source: Credit Suisse, Commercial Mortgage Alert
30 October 2013
CMBS Market Watch Weekly 16
Relative Value Monitor
Exhibit 14: 10-year sector – CMBS, REIT, and corporate spreads
Note: Liquid U.S. Corporate Index is an investment-grade, corporate bond index consisting of ~800 liquid, US dollar-denominated issues, priced daily and rebalanced monthly by Credit Suisse. Source: Credit Suisse
Note: Liquid U.S. Corporate Index is an investment-grade, corporate bond index consisting of ~800 liquid, US dollar-denominated issues, priced daily and rebalanced monthly by Credit Suisse. Source: Credit Suisse
30 October 2013
CMBS Market Watch Weekly 17
Exhibit 17: CMBX prices as at October 29, 2013
CMBX 6 (CMBX 2013-1) AAA AS AA A BBB- BB
Current Price 96.56 97.88 98.69 98.61 95.05 92.95
Change vs. Prior Week 0.14 0.1 0.17 0.39 0.61 1.15
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