/perspectives/sector-views/commercial-mortgage-backed-securities-get-it-wher
Commercial Mortgage-Backed Securities: Get It Where You Can
Investors flocked to floating-rate investments in 2017 as rising Libor offsets post-crisis tights in spreads.
This Commercial Mortgage-Backed Securities sector report is excerpted from the First Quarter 2018 Fixed-Income Outlook.
CMBS new issuance remained robust and pricing held steady throughout the fourth quarter. Conduit CMBS new-issuance volume was virtually unchanged from the same period in 2016, while large loan and single asset/single borrower (SASB) transaction volume soared to $14 billion, compared to $9 billion in the same period last year. The increased new issuance was almost exclusively in floating-rate transactions. Despite credit spreads being at post-crisis tights, one-month Libor’s rise from 0.77 percent on Jan. 3, 2017, to 1.57 percent at year end has caused yields to remain relatively high, and investor demand to appear insatiable. We are increasingly cautious of these floating-rate structures as investor compensation for riskier tranches is very low and deal terms tilt in borrowers’ favor with increased loan term extension options.
Large Loan and SASB New Issuance Soared in the Fourth Quarter of 2017
Large loan and single asset/single borrower (SASB) transaction volume soared to $14 billion, compared to $9 billion in the prior comparable period. The increased new issuance was almost exclusively in floating-rate transactions.
Source: Trepp, Guggenheim Investments. Data as of 1.19.2018.
Commercial real estate (CRE) market fundamentals enter 2018 somewhat mixed. Property performance growth has moderated from recent years, but is still positive. The decline in property performance growth negatively affected transaction volume in 2017, highlighting a valuation disagreement between buyers and sellers. In particular, we have noticed that buyers have slowed activity in primary markets and begun searching for opportunities in tertiary markets and value-add properties. That said, capitalization rate spreads, loan underwriting, and general economic conditions all remain favorable (perhaps with the exception of retail), and we struggle to find a catalyst that would broadly disrupt the health of the CRE market in the coming year.
Post-crisis CMBS, as measured by the Barclays U.S. CMBS 2.0 index, gained 0.5 percent in the fourth quarter. The senior-most AAA-rated tranche and AA-rated tranche of the index returned 0.3 percent and 0.8 percent, respectively, while A-rated and BBB-rated CMBS 2.0 tranches had stronger total returns of 1.1 and 1.8 percent, respectively. For the year, CMBS 2.0 returned 3.9 percent.
We favor more defensive, loss-remote investments in conduit CMBS and CRE CLO transactions. We have also remained active in SASB where the underlying property quality is high and transaction terms are fairly balanced between lender and borrower.
Underwriting Statistics Support a Constructive View of Conduit Fundamentals
Loan underwriting discipline has remained strong in CMBS. Percentage of loans with loan to value of greater than 74 percent are at post-crisis lows, while debt service coverage ratios remain high.
Source: Trepp, Guggenheim Investments. Data as of 1.19.2018. Note: There was no issuance in 2009, the year after the financial crisis.
—Peter Van Gelderen, Managing Director; Shannon Erdmann, Director; Simon Deery, 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, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2018, 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.
FEATURED PERSPECTIVES
September 18, 2020
Guggenheim’s 2020 Election Portfolios
Our portfolios are constructed based on the key aspects of each candidate’s policy agenda that we believe will move markets. We will publish daily updates in the run up to the presidential election on Nov. 3, 2020.
July 29, 2020
China Matters More Than Ever
Cooperation and understanding between China and United States is vital as global economic and environmental challenges mount.
VIDEO
Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.
Brian Smedley, Head of Macroeconomic and Investment Research, discusses major trends likely to shape markets this year.
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 06.30.2020 and includes leverage of $13bn.
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.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. Only a Guggenheim Credit Income Fund 2019 (GCIF 2019) prospectus makes such an offer. This material is authorized only when it is accompanied or preceded by a GCIF 2019 prospectus. Neither the SEC nor the Attorney General of the State of New York nor any other state regulator has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Securities are offered through Guggenheim Funds Distributors, LLC, member of FINRA/SIPC, as Dealer Manager.
©
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.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”