Bloomberg News

Wells Fargo, RBS Lower Spreads on Commercial-Mortgage Bond Deal

July 20, 2012

Wells Fargo & Co. (WFC:US) and Royal Bank of Scotland Group Plc (RBS) reduced relative yields on debt tied to commercial mortgages as investors are drawn to the securities amid record-low interest rates.

The lenders are issuing top-ranked debt maturing in about 10 years to pay a spread of 120 basis points more than the benchmark swap rate, according to a person familiar with the offering who asked not to be identified because terms aren’t public. The banks initially marketed the securities to yield as much as 135 basis points more than the benchmark. Morgan Stanley and Bank of America Corp. sold similar debt paying a spread of 135 basis points last week, according to data compiled by Bloomberg.

Wall Street banks aim to increase originations of loans tied to office buildings, shopping malls and hotels as investors seek out riskier assets with the Federal Reserve keeping interest rates at record lows into a fourth year. Wells Fargo increased its 2012 forecast for commercial mortgage-backed securities issuance to $35 billion from $25 billion last week, and Credit Suisse Group AG projects as much as $45 billion this year.

Relative yields on top-ranked bonds linked to commercial mortgages have dropped to 172 basis points more than Treasuries as of yesterday, down from 261 basis points on Dec. 30, according to a Barclays Plc index. A basis point is 0.01 percentage point.

122 Properties

The offering from Wells Fargo and Royal Bank of Scotland is tied to 80 loans on 122 properties across the U.S., the person said. Retail properties account for 37.2 percent of the pool, the largest portion, with office mortgages making up 29.6 percent of the deal.

Leverage on recent deals is increasing as banks compete for a limited pool of borrowers, with the level of today’s sale “slightly higher” than previous deals this year, according to Fitch Ratings. The mortgages are about 97.4 percent of the properties’ worth, compared with the average 94.2 percent for 2012 offerings, Fitch said in a July 17 assessment of the transaction. The banks peg the current ratio of loan-to-value at 63.4 percent.

Wall Street has arranged about $16.8 billion in commercial mortgage-backed securities this year, compared with $28 billion in all of 2011, according to data compiled by Bloomberg. A record $232 billion of the debt was sold in 2007.

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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Companies Mentioned

  • WFC
    (Wells Fargo & Co)
    • $55.72 USD
    • 0.44
    • 0.79%
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