Is the CMBS Rally Really Here to Stay?
Investors recently took down 2.3 billion dollars in TALF loans under the August Federal Reserve's Legacy CMBS Term ABS Loan Facility, representing an impressive increase from the modest July subscriptions of 668 million.
Over the past few months, we have seen CMBS AAA spreads tighten, although at this writing this trend seems to have abated, at least temporarily. The August Legacy CMBS TALF offerings bear interest rates at 3.03% on fixed-rate 3-year loans and 3.9% on fixed 5-year loans. That seems relatively cheap money to most of us. With the only eligible securities being "super senior" AAA's with relatively specific additional underwriting criteria required by the treasury for the securities to be TALF eligible, one wonders why the great interest in this market. Part of the explanation is that the Treasury and Federal Reserve are offering relatively attractive federal loans and co-investing with the private sector through the Legacy Loan and Legacy Securities Programs. These programs provide highly leveraged Treasury funds, both as debt and equity. Therefore, much of the attractiveness is not in the AAA CMBS product itself, but comes by way of government subsidies.
It will be interesting to see how CMBS products will trade after the Treasury Department withdraws its financial support for the product. But in the meantime, the Treasury Department's programs are serving their intended purpose of decreasing the CMBS "overhang," and at the of rate 2.3 billion dollars for last month, that's not a bad rate for taking Legacy CMBS bonds off the market.
The larger question is how will the new capital being generated by these loan transactions be reinvested? Will our financial institutions make this capital available in a market place, or will they, as has been done in the recent past, simply hang on to the funds?
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