A CMBS benchmark deal aimed at boosting price discovery and secondary market liquidity is on the wish list of a number of attendees at the CRE Finance Council conference in Miami this week, according to industry executives speaking on the sidelines.
CREFC’s CMBS Secondary-Market Liquidity Task Force is considering the merits of pushing for a large benchmark deal similar to the pre-crisis USD 7.56bn GSMS 2007-GG10 to help jumpstart trading volumes, according to Lisa Pendergast, CREFC’s executive director. The task force, which includes banks and investors, was launched last year.
Regulations in recent years have made it more expensive for banks to hold CMBS on their balance sheets, limiting what they can buy, she said. “If I buy a bond from company X, company ABC doesn’t necessarily want to make markets in that bond,” Pendergast said. “If you only have a certain balance sheet you’re only going to support your bonds.”
The current face dollar volume of CMBS BWICs offered in 2017 declined to USD 98bn from USD 104.7bn in 2016, according to Empirasign. Secondary market supply has contracted consistently since 2013, when BWIC volume was USD 149bn.
The need for a benchmark bond was discussed by industry participants in closed-door meetings at CREFC as well as by at least one panel, according to Thomas Digan, co-chair of the liquidity task force and partner at Sorin Capital Management, a hedge fund that specializes in commercial real estate securities.
“Everyone was generally in agreement that if the top dealers co-issued under a branded shelf one or two benchmark deals a year that it might solve some liquidity issues,” Digan said. “It would need to be a large transaction, ideally USD 1.5bn-USD 2bn and widely syndicated.”
A benchmark bond provides a standard against which the performance of other bonds can be measured, he said. If such a deal was widely owned and quoted on runs by all of the participating dealers, Digan said the expectation is that the market would see improved liquidity via higher turnover and better price discovery.
The biggest assumed hurdle would be placing the last cash flow AAAs, but a number of the largest senior AAA buyers indicated that they would be supportive, Digan said. JPMorgan, Deutsche Bank and Citi are currently in the market with a USD 1.1bn deal under a new “BMARK” shelf, which is potentially a first step in the process, he said.
GSMS 2007-GG10’s balance has fallen to USD 476.3m, according to Trepp. The transaction’s large size won’t likely be replicated in today’s market, where USD 800m conduits are more typical, according to an industry executive.
Also, the GSMS deal’s performance isn’t something that a new benchmark deal would want to replicate — its bonds have been assessed about USD 1.2bn in losses to date, according to Trepp.