Bloomberg News

Commercial Mortgage Investors Have ‘Reason to Smile’, BofA Says

November 01, 2011

Oct. 31 (Bloomberg) -- Securities tied to commercial property mortgages rose after European leaders reached an accord on the region’s debt crisis and investors stepped up trading in lower-ranking bonds.

The extra yield investors demand to own top-ranked debt backed by loans against shopping malls, skyscrapers and hotels declined to 263 basis points on Oct. 28, the lowest since early August, after soaring to as high as 323 basis points on Oct. 18, according to the Barclays Capital CMBS AAA Super Duper index.

“Investors that had been watching CMBS underperform other risky credit sectors over the past few months finally got a reason to smile,” Bank of America Corp. analysts led by Alan Todd said in Oct. 28 report.

Trading in bonds linked to commercial real estate accelerated after an agreement with Greece’s creditors spurred holders to seek offers for the debt amid a surge in demand for riskier assets. Investors sought bids on about $2 billion of the securities last week, compared with $800 million during the week ended Sept. 2, according to Bank of America.

Investment firms sought to arrange trades in securities pummeled by a lack of price clarity as dealers stepped back from trading the debt, according to Bank of America.

“Even though there may have been a cadre of investors that wanted to buy the bonds and believed they looked cheap, they were hesitant to do so, lest they catch a falling knife,” the analysts said.

Appaloosa Steps In

David Tepper’s Appaloosa Management LP was circulating offers to buy and sell bonds with a face value of at least $8 billion of so-called AJ commercial-mortgage backed securities, people familiar with the lists said last week. That type of debt had plunged as much as 40 points after reaching 90 cents in April, according to Deutsche Bank AG.

Prices on the bonds, many of which had their credit ratings cut to junk from AAA, rose as much 10 points last week, according to Deutsche Bank data. A bond sold by JPMorgan Chase & Co. in 2007, JPMCC 2007-CB18 AJ, climbed to 65 cents on Oct. 27 after being bought for 55.5 cents on Oct. 25, according to Deutsche Bank.

The move by a hedge fund to sidestep Wall Street dealers may be a ”milestone” in the $600 billion commercial-mortgage bond market, though it is not likely to result in a permanent shift, Deutsche Bank analysts led by Harris Trifon said in a report last week. Investors should be wary of the steep price appreciation because the market for lower-ranking bonds is thin, according to Deutsche Bank.

“We don’t believe that dealers will be able to participate in a big way,” according to Deutsche Bank. “As a result we recommend that the rally in the credit space is one that should be faded.”

--Editors: Sharon L. Lynch, John Parry.

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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