CMBS: Rising Demand For Floating Price Merchandise

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By Nivea Valsaraj

Floating-rate SASB products are new favorites in the commercial mortgage-backed securities market, given their shorter tenors and greater prepayment flexibility.

The CMBS market has grown steadily over the past few years, crossing the $700 billion levels seen before the Global Financial Crisis. A significant contributor to the market’s growth has been the single asset, single borrower (SASB) segment, which comprises securitization of a single loan to a single borrower collateralized by one very large property or a portfolio of smaller properties. Typically, in our view, these tend to be “trophy” properties, ie, highest quality, best location or large property portfolios.

The SASB market has grown steadily, overshadowing the conduit market, due to increase demand for these flexible products. While issuance was historically dominated by conduit deals, issuance composition reversed in 2021 with SASB volumes double those of conduit issuance. Year-to-date issuance shows similar trends, with strong primary issuance in the SASB market. In particular, floating-rate SASB deals have been the predominant issuance format, comprising 90% of the SASB market and 48% of non-agency CMBS new issuance volumes since 2021. These deals typically have a five- or seven-year legal final loan Maturity that is callable after 12 to 18 months and contains annual financial performance tests that must be met after the initial two years.

The apparent preference for the floating SASB market can be attributed mainly to the shorter loan tenor and greater prepayment flexibility it affords borrowers. SASB borrowers are typically transitional property owners such as real estate private equity funds that desire the ability to prepay debt if the property is recapitalized or sold. While SASB loans have some prepayment protections such as spread maintenance, these are typically less costly than the yield maintenance and defeasance provisions found in fixed-rate loans. Additionally, this preference can be partially attributed to the recent downturn during 2020 – 2021. With a large number of properties such as malls and hotels that experienced pandemic-induced performance disruptions, borrowers have preferred more flexible loans that can be refinanced more easily once property performance has fully recovered.

With AAA spreads currently around 160 – 190 bps and BBB spreads around 280 – 400 bps for representative large, actively traded deals, we believe this segment offers competitive relative value. AAA-rated floating-rate SASB deals have widened by 100 bps while BBB-rated deals have widened by 164 bps in recent months, compared to Bloomberg US corporates’ widening of 65 bps. With higher rates and wider spreads, the market will likely see slower issuance in the coming months.

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