Commercial Mortgage Market Monitor October 2016

Fixed Income Commentary


The legacy CMBS refinance success rate continued to decline in October, with adverse selection and tighter lending standards making it more difficult for the outstanding universe of loans to refinance. The rate of successful payoffs during the month (based on full payoffs that occurred on or before the original scheduled maturity dates) was 62%, down from 67% in September. Year-to-date the refinance success rate stands at 71%, down from 79% for the full-year 2015. While the refinance success rate declines, the legacy CMBS delinquency rate continues its march higher, to 14.4% in October, from 13.9% in September. Although the increasing delinquency rate is largely the result of the denominator effect, it is also indicative of the number of loans that are nearing maturity without refinancing in place, leading to maturity defaults and imminent maturity defaults.

As the legacy universe winds down, with lower payoff rates and higher delinquencies, loan resolutions become increasingly important. In October, the volume of loan liquidations increased to $847MM (54 loans), up from $617MM in September. The majority of the liquidated loans were from the 2006 vintage, representing 94% of the balance. The average loss severity declined month-over-month, with October liquidations averaging a 39% loss, down from 50% in September; however, excluding non-material losses (<2.0% loss), the average severity increased marginally to 62%, from 59% in September.

The CMBS 2.0 universe continues to perform well, with an October delinquency rate of 0.16%, down from 0.24% in September, and a special servicing rate of 0.38%, unchanged month-over-month. The 2.0 watch list rate was 8.6% in October, and has remained in the 8-9% range for most of the year, with the majority of flagged loans experiencing low debt service coverage ratios related to idiosyncratic operating issues. In the primary market, four conduit deals ($3.8BN) priced, 35% lower than September and 38% lower than October 2015 issuance volume, with benchmark 10yr LCF AAA’s pricing between swaps +111-120bps (+128bps year-to-date average and +105bps full-year 2015 average) and BBB-‘s between swaps +525-615bps (+644bps year-to-date average and +423bps full-year 2015 average). High-level credit metrics remain stronger than 2015 averages, with average October Cut-Off Loan-To-Value (LTV) ratios at 59.6% (60.2% 2016 year-to-date average and 64.5% 2015 full-year average) and Balloon Maturity Loan-to-Value (LTV) ratios at 52.4% (53.5% 2016 year-to-date average and 56.5% 2015 full-year average), and average Debt Yield’s (DY) at 11.08% (11.20% 2016 year-to-date average and 10.60% 2015 full-year average).

In SASB new issue, six deals ($3.0BN) priced, +38% higher than September and +62% higher than October 2015. Four of the six deals were floating-rate, three of which were secured by off-the-run collateral, including a portfolio of master leased Toys R US/Babies R Us stores, a portfolio of master leased skilled nursing facilities, and portfolio of trade showrooms. Only one ten-year fixed-rate SASB deal priced, $214MM COMM 2016-667M, secured by a 24-story Class A office located in the Plaza District of Manhattan. The transaction was structured with the intention of being Risk Retention-compliant (December 24th implementation), using a 5.0% market-value horizontal interest sold to a third party; the 10yr AAA’s priced at swaps +117bps while the 5% market value first-loss horizontal interest priced at swaps +355bps.

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