CMBS Issuance Up, Underwriting Deteriorates

Non-agency commercial mortgage-backed securities issuance totaled $94.59 billion in 2015, up 6.3 percent compared to 2014, reported Wells Fargo Securities, Charlotte, N.C.

Wells Fargo Securities said conduit volume increased 8 percent to $61.9 billion last year while single-borrower transactions increased 20 percent to $30.3 billion.

“The deterioration in underwriting continued in 2015,” Wells Fargo Securities Senior Analyst Chris van Heerden said in the firm’s 2015 Final Statistics report. Debt yields moved lower by 23 basis points, averaging 9.8 percent, while the share of loans with debt yields below nine percent increased to 46.5 percent. Amortizing loans fell to 33 percent as full-interest-only loans climbed to 23.7 percent. Partial-IO loans remained flat at 43.2 percent.

Wells Fargo Securities said debt service coverage ratios improved modestly last year to 1.78x from 1.76x in 2014, “but the improvement came in a year that saw the average loan coupon decline 28 basis points,” the report said. Loan-to-value ratios averaged 64.8 percent for the year, down from 65.8 percent in 2014, but higher than other post-crisis vintages.

Brian Olasov, executive director of financial services consulting with Carlton Fields, Atlanta, said the data reveal some trends that run contrary to conventional wisdom. “Underwriting quality at the loan and bond level send mixed signals,” he said. “On the positive side, BBB subordination levels have increased, junior debt frequency has declined and debt service coverage and LTVs have marginally strengthened year-on-year. But on the downside, IO frequency is now present in two-thirds of loans, debt yield dropped below 10 percent for the first time in CMBS 2.0 and the dispersion of low debt yields is greater.”

Olasov said CMBS saw two distinct markets in 2015. “During the first half of the year, spreads were stable up and down the credit curve and deal sizes averaged over $1.1 billion,” he said. “This extended the benign market conditions of 2014. But starting in July, spreads both increased and became more volatile.” But he noted that spread volatility increased across all credit products, not just CMBS. 

“That’s always been the double-edged sword of CMBS: it greatly deepens the pool of commercial real estate debt investors, but it exposes investors to the vagaries of the capital markets,” Olasov said. “If the wall of regulations on structured products is implemented as proposed, expect liquidity to drop and volatility to continue.”