Bloomberg News

Deutsche Bank, UBS Cut $2.2 Billion CMBS Deal as Yields Rise

July 27, 2011

(Updates with UBS declining to comment in fifth paragraph.)

July 27 (Bloomberg) -- Deutsche Bank AG and UBS AG cut a $2.2 billion sale of commercial-mortgage backed securities by more than 36 percent as investors pull back amid a rush of offerings from Wall Street banks.

The lenders, unable to close all the planned loans to be bundled into the transaction after yields on the debt rose, reduced the deal to $1.4 billion, according to people familiar with the sale. The offering is set to be marketed to investors next month, said the people, who declined to be identified because the transaction hasn’t been announced.

Banks issued $3 billion in commercial-mortgage backed bonds last week at the highest yields this year as investors pushed back on deal terms and debt crises in the U.S. and Europe roiled markets. About $1.4 billion of securities tied to shopping centers and hotels are being offered this week, according to data compiled by Bloomberg.

The bottleneck is making it hard for investors to digest sales, according to Julia Tcherkassova, a mortgage-debt analyst at Barclays Capital in New York.

Deutsche Bank spokeswoman Amanda Williams and UBS’s Torie von Alt declined to comment.

Underwriters accumulate loans over several months to pool for sale as securities. When yields rise on the bonds, lenders may not be able to provide the same terms previously offered.

Loss Buffer

Goldman Sachs Group Inc. and Citigroup Inc. had to overhaul one of the deals issued last week after investors demanded more of a buffer against losses. They increased relative yields on BBB bonds by 200 basis points to 700 basis points more than benchmark swap rates on the offering.

Similar debt rated BBB-, the lowest investment-grade ranking, was sold to yield 295 basis points, or 2.95 percentage points, over the benchmark in February.

The extra yield investors demand to hold the top-ranked portion of bonds backed by commercial mortgages has risen 5 basis points to 214 basis points over Treasuries since June, according to Barclays Capital data.

More than $21 billion of commercial-mortgage bonds have been sold this year, compared with $11.5 billion in all of 2010, Bloomberg data show. Sales of the debt peaked at $234 billion in 2007, helping fuel a boom in property prices. Issuance plummeted to $12.2 billion in 2008 as souring subprime-home loans infected credit markets. The market stayed closed until November 2009, choking off funding to borrowers with debt coming due.

Deals being sold since sales revived have all been issued in the private market, shutting out some investors that can only buy public transactions, according to Tcherkassova from Barclays. Making the transactions public would broaden the investor base, she said.

JPMorgan Chase & Co. cut its 2011 forecast for sales of bonds tied to commercial mortgages to between $30 billion and $35 billion last week as volatile prices curb profitability for Wall Street banks. The New York-based lender projected in November as much as $45 billion in new offerings for this year.

--Editors: Pierre Paulden, Alan Goldstein

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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