Bloomberg News

Opacity May Stymie CMBS Derivatives Index, Credit Suisse Says

October 10, 2011

Oct. 10 (Bloomberg) -- A proposal requiring dealers to provide individual marks on bonds underlying commercial-mortgage derivative contracts was voted down, potentially creating a drag on liquidity, according to Credit Suisse Group AG.

Markit Group Ltd. started the index last week to mimic the performance of debt backed by property loans sold after 2009, in part to provide lenders with a way to offset the risk of warehousing mortgages earmarked for sale as securities.

One impediment for the new index gaining traction is concern that marks provided by dealers anonymously aren’t reliable, Credit Suisse Group analysts said in an Oct. 7 report. Greater transparency would have raised the level of confidence and increased the odds of the index being a success, said the New York-based analysts.

“This change would have forced accountability and encouraged all of the index market makers to provide thoughtful and accurate marks on these bonds on a nightly basis,” said the analysts led by Roger Lehman.

Wall Street banks have ratcheted back new lending as the $600 billion market for bonds linked to everything from skyscrapers to strip malls has been whipsawed amid concern that the global economic recovery is stumbling. Volatile spreads and the lack of an effective tool for lenders to guard against losses while mortgages are being pooled for sale are the biggest impediments to new issuance, Bank of America Merrill Lynch New York-based analysts led by Alan Todd wrote in an Oct. 3 report.

Drop in Values

It takes several months to accumulate debt to package for sale as bonds, and a drop in values means that lenders may be stuck with unprofitable loans.

The extra yield investors demand to hold top ranked commercial-mortgage bonds instead of Treasuries jumped to 323 basis points on Oct. 4, the most since February 2010, before narrowing to 321 basis points on Oct. 7, according to Barclays Capital index data. Spreads on the Barclays Capital CMBS AAA Super Duper Index were as low as 178 basis points, or 1.78 percentage point, on April 26, the index data show.

Wall Street has arranged about $25.6 billion in commercial- mortgage backed securities this year, compared with about $11.5 billion in all of 2010, Bloomberg data show. Sales plummeted to $3.4 billion in 2009 compared with a record $234 billion in 2007, choking off funding to borrowers with debt coming due.

--Editors: John Parry, Pierre Paulden

To contact the reporter on this story: Sarah Mulholland in New York at

To contact the editor responsible for this story: Alan Goldstein at

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