03/18/2011

Deutsche, Others Weigh Floating-Rate Deals

Several conduit shops are exploring whether to resume securitizing floating-rate loans.

At least a half-dozen lenders have begun to quote floating-rate mortgages to prospective borrowers. A few have already closed floaters and parked them on their balance sheets, leaving open the possibility of eventual securitization.

Deutsche Bank appears to be the furthest along in pursuing a floating-rate securitization. The buzz is that it might launch a deal as soon as this summer. J.P. Morgan and Morgan Stanley are also taking a close look at the idea. Other lenders quoting spreads for floating-rate loans that could be securitized include Cantor Fitzgerald, Citigroup, FundCore and LoanCore.

Deutsche wrote a $425 million floater in January as part of a debt restructuring for Blackstone on the 700-room Hotel del Coronado near San Diego. And earlier this month, Morgan Stanley wrote a $300 million floater on the 1.5 million-square-foot office condominium at 666 Fifth Avenue in Midtown Manhattan. Each bank is thinking about including its loan in a pooled, floating-rate deal.

While floating-rate transactions traditionally accounted for about 15% of CMBS volume in the U.S., there have been no such offerings since issuance resumed in November 2009 following a 17-month lull. Since then, all 16 U.S. transactions, totaling $11.4 billion, have been backed by fixed-rate mortgages.

Several factors have conspired against the resumption of floating-rate deals. For one thing, floating-rate loans are usually sought by owners of transitional properties that don't qualify for long-term financing. Under the stricter loan-underwriting standards now prevailing, it's harder to find suitable borrowers.

Also, because of the riskier nature of the collateral, floating-rate securitizations suffered disproportionately during the downturn, giving them a black mark in the eyes of some investors. That leaves uncertain how much demand there would be for floating-rate paper.

“There are bond buyers who will say they want to see floaters come back because they have floating-rate liabilities that they want to match to these assets,” said one veteran issuer. “But I think the demand for this product might be very shallow.”

Another major obstacle: historically low Libor rates, which serve as the benchmark for the rates borrowers pay on floaters. With Libor near zero, the rates on Libor-based loans would typically be less than 4% after the spread for credit risk is tacked on. It's difficult to sell bonds with the resulting yields, which would be even lower.

Also, because it would take longer to amass floaters than fixed-rate loans given the lower supply of lending opportunities, lenders would have greater risk from warehousing mortgages.

Nevertheless, the re-emergence of floating-rate securitizations seems to be a foregone conclusion. The only question is when.

Some lenders still doubt that floating-rate deals will emerge this year. “I am skeptical,” said one veteran issuer. “I've been hearing for six months that a floater was coming. We have seen a few people doing floating-rate loans, but these have all looked like good carry for their balance sheets.”

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