03/27/2009

Geithner Plan Raises Hopes of CMBS Pros

The U.S. Treasury Department's proposal for spurring the trading of toxic assets touched off a huge rally in the commercial MBS market this week, leading some players to conclude that the tide might have turned.

Spreads on super-senior bonds from the benchmark "GG-10" deal tightened by almost 400 bp, to 855 bp over swaps, after Treasury Secretary Timothy Geithner revealed the plan on Monday.

"I really think the government is serious about doing something to get the securitization market going again," said one CMBS veteran. "This is very encouraging news."

Geithner's announcement confirmed that commercial real estate assets would be included in various financing programs being set up by the government. It also expanded the efforts to include high-rated "legacy assets" - both bonds and loans - clogging the balance sheets of banks. That combination, which would supply a big jolt of financing to an illiquid market, buoyed CMBS traders and investors, some of whom viewed the development as a potential "game-changer."

"We think that this program could first stop, then reverse the negative feedback loop of declining asset prices and delevering, which leads to further price declines that has plagued the markets over the past year," said Alan Todd, CMBS analyst at J.P. Morgan. He predicted that spreads on super-senior paper could tighten to 600 bp over the next several months, helping to set the stage for lenders to resume originating.

While many details about the plans haven't yet been disclosed, analysts said that buyers should be enticed by the government's generous financing terms, which would likely generate double-digit returns - potentially even reaching 50% or more under the most-optimistic scenarios.

Geithner's plan includes two main components: the Private-Public Investment Program, under which the government and investors would enter 50-50 partnerships to buy seasoned bonds and loans, with federal debt financing; and the expanded Term Asset-Backed Securities Loan Facility, which offers generous debt financing to buyers of a wide variety of new and seasoned bonds, now including CMBS.

Before the announcement, buyers had fretted that loans provided by TALF would mature in three years, creating a term mismatch with 10-year CMBS. But this week, the government indicated that it would consider the duration of the investment when determining the term of the loan.

The announcement caused the dollar price on super-senior bonds from the GG-10 deal to rise to 73 on Tuesday, from about 58 last Friday. The spread tightened to 855 bp over swaps from 1,227 bp. The $7.6 billion GG-10 deal, one of the largest CMBS deals, tends to mirror the ups and downs of market sentiment. Goldman Sachs and RBS Greenwich floated the transaction in June 2007.

The benefit was felt further down the credit stack, too. An assortment of mezzanine-level, or "A-M," triple-A bonds went from a dollar price in the low 30s on Friday to the low 40s after the Geithner announcement. "A-M" bonds typically have a 20% subordination level, versus 30% for super-senior bonds.

Even low investment-grade bonds got a boost, although only a mild one. The spread on the triple-B-minus tranche of Series 5 of the synthetic CMBX index tightened to 5,950 bp on Tuesday from 6,250 bp last Friday.

Spreads stayed relatively flat the rest of the week, as investors awaited more details on the federal programs. "Now the market wants to know what the terms of the financing will be," said one insurance-company investor. "If the terms are better than expected, the potential returns could be even higher" than initially expected.

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