TRANSWESTERN
From the Field: A Rocky Road for CMBS
How will continuing turmoil in the capital
markets impact the financing landscape?
By Jan Sparks & Michael Snodgrass
Senior Vice Presidents
Structured Finance Group - Houston
All leading indicators point
to the commercial mortgage
backed security (CMBS) market
attempting a strong revival. Lenders
are optimistic with their outlook
and production goals for 2012.
There is a variety of predictions
regarding the securitization of
commercial mortgages in 2012
ranging from $38 billion to $69.6
billion, a forecast that mirrors
the 2011 prediction. However,
after last year’s summer heat
wave, originations wilted and
saw only $29.4 billion in CMBS
loans actually securitized, a far
cry from the $68.8 billion 2011
prediction. No one foresaw the
upcoming financial turmoil in the
Euro-zone, the “B piece” buyers
(the most profitable tranche in a
securitization, but also the most
vulnerable) pulled out early and
the market subsequently collapsed.
While CMBS activity did increase
in 2011, it was constrained by strong
competition from investment
banks that had their own balance
sheet lending programs, a shortage
of refinancing opportunities that
fit the securitization guidelines
and the European crisis, which still
remains the biggest variable for the
2012 market.
There is no lending boom predicted
in the near future, but there is a
general consensus that the market
is recovering. The current 2012
pipeline does show improvement
in the market over the last half of
2011. $40 billion in securitized
mortgages are scheduled to mature
over the next twelve months;
however, many of those loans
that were floating and scheduled
to mature this year have obtained
extensions. Five-year loans that
mature in 2012 will be harder
to refinance than in 2011 due to
collateral properties not being able
to meet a key test that lenders now
use to evaluate the credit quality.
The new underwriting guideline
called, “debt yield” is calculated
by dividing the property’s net
operating income by the loan
amount. Acceptable debt yields
vary by property type and class,
but in general the minimum debt
yield required is normally at least
10 percent. Lenders have gotten
away from the traditional way of
underwriting by strictly sizing
deals by LTV (Loan to Value)
and DSC (Debt Service Coverage
ratios). LTV and DSC ratios are
still taken into consideration, but
the Debt Yield Ratio usually takes
precedence. This calculation has
become more widely used because
it can be applied to a broader range
of financing structures. Whether
your respective debt structure
1Q2012 INSIGHTS TRENDS OPPORTUNITIES
