ValueXpress, which provides CMBS investment advisory services to community banks, has recommended a select set of 2005 AJ CMBS for its bank clients to purchase, and many have made purchases in the past week at yields in excess of 6% for CMBS with an average life of about four years. This compares very favorably with rates on whole loan originations while using only one-fifth of the bank’s capital.
“For most of 2011, CMBS prices on new issue CMBS (post-2010) and legacy CMBS (pre-2008) rose to very high levels, depressing yields to the 3%-4% area and dollar prices well above par on better legacy and new CMBS, which were pretty attractive relative to Treasury securities, but not so great on a risk-adjusted basis,” said Jim Brett, head of CMBS analytics at ValueXpress.
Through this summer, as spreads widened on new CMBS issues, spreads were also widening on legacy issues, particularly in the AM and AJ classes, including certain high-quality AJ bonds from 2005. About half of the bonds we like are AAA/Aaa-rated by Standard and Poor’s and Moody’s and half AA/Aaa. Both of these ratings provide for 20% risk-weighted capital charge for banks versus 100% risk-weighted charge for a whole loan.
Having originated many CMBS conduit loans in CMBS securities, ValueXpress is able to analyze the loans underlying each CMBS issue, determine those issues with better performing loans, and then make recommendations to its community bank clients to invest in those CMBS issues. The rigorous analytics and resulting conclusions have held up well, providing significant profits for ValueXpress bank clients that followed its CMBS investment recommendations during the financial collapse in 2008-2009 and subsequent market recovery in 2010.
