Following the wild success of the last quarter’s first-ever risk-retention transaction, Wall Street banks lined up to offer traditional conduit transactions, a watered-down variant of a risk-retention transaction, plus a slew of new large loan transactions. September alone saw 10 new CMBS transactions and the announcement of 15 more (both Agency and non-Agency) by year end. Market participants shuddered under the onslaught of these new “opportunities,” and the market widened 5–30 basis points in response to the deluge in supply. Heightened market sensitivity to leverage, underwriting, and property quality have caused a pronounced market price tiering for new-issue CMBS transactions. Collateral quality in the new transactions varied greatly (our creditrejection rate is the highest it has been all year), and market reception supported the higher-quality, lower-levered transactions at the expense of more aggressive transactions. Anecdotally, a more aggressively underwritten transaction suffered relatively poor execution despite the sponsor retaining 3 percent of the transaction. Consensus views on the value of risk retention were somewhat undermined by the execution of that transaction. Credit sensitivity feels unusually high in CMBS markets right now.
Post-crisis CMBS, as measured by the Barclays U.S. CMBS 2.0 index, posted a positive total return of 0.9 percent for the third quarter. The senior-most AAArated tranche of the index returned 0.5 percent, while the AA-rated, A-rated, and BBB-rated CMBS 2.0 tranches had stronger total returns of 2.1, 4.3, and 2.6 percent, respectively.
We remain active in conduit CMBS, with heightened attention to relative value offered by varying degrees of market sponsorship, but recently we have also been able to locate opportunities in select shorter-tenor large loan transactions. Insurance companies’ voracious appetite for large loan transactions in the first half of the year has abated in the second half, and large loan CMBS financings have recently offered relatively attractive opportunities. Large loan financing of non-core property types and low leverage purchase transactions have been a particular focus for us.
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.
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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, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim").
Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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*Guggenheim Investments total asset figure is as of 12.31.2016. The assets include leverage of $12.3bn for assets under management and $0.4bn for assets for which we provide administrative services.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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