Commercial Mortgage-Backed Securities: Strong Demand, But Not for WeWork
Liquidity remains strong after the largest post-crisis SASB and CRE-CLO deals.
The CMBS sector continued to enjoy healthy liquidity despite new issue deal sizes growing larger in the third quarter. The largest post-crisis single-asset/single borrower (SASB) deal was issued at a staggering $5.6 billion. The deal was announced and closed in less than one week, showing the strength in demand. The deal creates a new benchmark for the SASB world as there were six co-managers on the deal and each of these dealers is making daily markets on the entire capital stack. Usually, the SASB market is more bespoke, with only a few dealers specializing in certain deals. In CRE-CLO, two transactions priced at over $1 billion, including the largest CRE-CLO issued to date at $1.2 billion. The market received both deals well, with spreads remaining relatively unchanged from previous issuances. As a result of the success of these larger transactions, we expect the average CRE-CLO pool size to continue to grow in 2020.
Average CRE-CLO Pool Size Should Continue to Grow in 2020
CRE-CLO Average Pool Size by Year
In CRE-CLO, two transactions priced at over $1 billion, including the largest CRE-CLO issued to date at $1.2 billion. The market received both deals well, with spreads remaining relatively unchanged from previous issuances. As a result of the success of these larger transactions, we expect the average CRE-CLO pool size to continue to grow next year.
Source: Guggenheim Investments, Wells Fargo. Data as of 9.30.2019.
Lastly, conduit liquidity remains strong, with as many as 10–15 dealers actively bidding on investment-grade bid lists.
The CMBS world was focused on WeWork’s IPO withdrawal, its halting growth, and its cost cutting efforts, leading to speculation of potential defaults on their debt obligations and lease payments. A large portion of WeWork’s portfolio is in New York, specifically midtown Manhattan.
A Contraction in WeWork's Manhattan Portfolio Could Trigger Higher Cap Rates
WeWork's Manhattan Portfolio
A large portion of WeWork’s portfolio is in New York, specifically midtown Manhattan. If WeWork needed to reduce its occupied space, Midtown office rents could decline, and cap rates could rise.
Source: Guggenheim Investments, Morgan Stanley. Data as of 9.30.2019.
If WeWork needed to reduce its occupied space, Midtown office rents could decline, and cap rates could rise. We have consistently maintained a bearish view on WeWork due to its business model of mismatching short-term assets with long-term liabilities. Additionally, the diversification in conduit bonds means that no one obligor can have a large impact to the overall transaction. The credit enhancement of investment-grade bonds provides additional protection from losses on any one loan.
While secondary liquidity is stable and credit metrics have remained relatively unchanged in new issue deals, we continue to be cautious about investing in conduit transactions as spreads are close to post crisis tights and bonds could underperform if we were to head into a recession.
—Shannon Erdmann, Director; Phil Hoehn, Vice President
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
June 08, 2020
The Fed’s Roadmap
The Fed has increasingly unorthodox policy options if the economy remains mired in a protracted downturn.
May 20, 2020
Reaching the End of the Runway
While the U.S. speculative-grade default rate could reach 15 percent in this cycle, the market is offering better entry points than seen in years.
Brian Smedley, Head of the Macroeconomic and Investment Research Group, and Portfolio Manager Adam Bloch share insights from the fourth quarter 2019 Fixed-Income Outlook.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.