The first week of 2011 saw a ferocious rally in CMBS: spreads plummeted across all classes of CMBS in new and older vintage issues. The benchmark CMBS issue, GSMS 2007-GG10, ended the week at 210 basis points (bp) over swaps and is poised to break 200 bp, a level not since early July 2008. Also, pronounced spread compression was apparent in AM class and AJ class CMBS. Spreads tightened on 2006 and 2007 vintage class AM CMBS by 50 bp while 2006/2007 class AJ bonds were tighter by about 75-90 bp.
“We took advantage of this rally to help one of our banking clients take profits,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Throughout 2010 we recommended and helped the client purchase a $50-million portfolio of about 15 CMBS position in 2005 vintage AM and AJ bonds. We identified a short list of better-performing issues using Trepp to analyze the cash flow performance of the underlying real estate loans,” said Sneden. “We like 2005 issues because overly aggressive loan underwriting was starting to take hold, but was not yet out of control. The portfolio was purchased at an average dollar price of about 98 cents and sold in the 103-104 area, providing a profit over $2 million.”
“We are recommending the client reload on class B new issue CMBS. Class B only has 14% subordination relative to the 20% provided by Class AM CMBS, but we are convinced that 2010 and 2011 CMBS will be the best-performing issues over the next 10 years as we start the cycle of conservative underwriting to aggressive underwriting all over again,” said Sneden. “We anticipate losses of no more that 3%-4% on new issue CMBS, affecting the lowest classes but providing an ample 10% loss cushion for the class B CMBS.”
