Renewed Lending Revives CMBS Market

Goldman Sachs and Citigroup will sell $1.1 billion in commercial mortgage-backed securities next week as the market rebounds from price volatility and a dry spell in lending during the second half of last year, according to a term sheet circulated to investors Tuesday.

CMBS risk premiums that had blown out in the third quarter have declined since November as investors became less fearful another U.S. recession was near or Europe’s debt crises would upend the global economy. Yield spreads on CMBS made during the peak of the real estate boom have declined to about 260 basis points over an interest-rate benchmark as of Friday, from nearly 400 basis points in October, according to J.P. Morgan Chase & Co.

Yield spreads on newer, more conservatively underwritten CMBS are about 125 basis points over an interest-rate benchmark, down about 10 basis points since early December, J.P. Morgan data show.

The CMBS from Goldman and Citigroup will include $808 million in publicly registered debt with a “credit enhancement” of 30%, a level above what had typically been demanded under credit rating guidelines in 2011. (This means that 30% of the deal would have to default before the senior holders sustained any loss.) Another $277 million will be sold privately with credit-enhancement levels between 19.625% and 6%, the term sheet said.

Credit-enhancement levels went up last summer after investors started to gain an upper hand in pricing, and began balking at the low levels that dealers were pushing through. The higher levels have become standard for new issues, and are here to stay even if the CMBS market continues its uptick, analysts say.

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