CMBS investors seek relief from the Federal Reserve

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Investors in securitised products backed by commercial mortgages on hotels, casinos and malls are calling on the Federal Reserve to come to their aid, after a severe sell-off driven by the outbreak of coronavirus. 

The US central bank has already committed to injecting trillions of dollars into debt markets, buying up Treasuries, real estate mortgage bonds issued by government agencies such as Fannie Mae and Freddie Mac, and — for the first time — corporate bonds. 

But investors in commercial mortgage-backed securities, which take loans and slice them up into layers of debt with various levels of exposure to the default of the underlying asset, are calling on the US central bank to go further. 

The Fed has said it will purchase agency-backed CMBS, but that excludes vast swaths of “private-label” debt issued by hotel operators, casinos and other property owners that have come under pressure in recent weeks. 

“The market is very nervous,” said Gunter Seeger, a portfolio manager at PineBridge Investments. “The Fed should go further. Can you imagine they have a bailout for everyone under the sun — except the hotel industry? I find it hard to believe.”

The highest-rated triple A tranches of US CMBS have blown out to a yield of 3.6 percentage points above benchmark swap rates, from below 1 percentage point at the start of the year, according to data from Trepp. Lower-rated, triple B tranches have risen from less than 4 percentage points above swaps, to over 11 percentage points. 

The debts of hotels, casinos and retail properties have come under particular strain owing to their exposure to the economic fallout stemming from Covid-19, as countries descend into lockdown and consumers retreat into their homes.

One B-rated tranche of a CMBS deal backed by a Hilton hotel in Honolulu has fallen from over 100 cents on the dollar at the start of the month to about 43 cents on the dollar on Thursday. “Clearly no one is going to a hotel at this point unless they have to,” said John Sim, an analyst at JPMorgan.

New deals have also ground to halt as banks struggle to offload loans to investors by arranging new CMBS issues. One such loan is backed by the MGM Grand and Mandalay Bay casinos in Las Vegas.

Regulatory filings show MGM Growth Properties, which sold a 49.9 per cent stake in the MGM Grand and Mandalay Bay properties this year to Blackstone, was given a $3bn loan by Citigroup in February.

Citi, along with Deutsche Bank, Barclays and Société Générale, then attempted to sell $1.9bn of the loan to investors in the CMBS market. The initial price guidance given to investors was for 1.25 percentage points above swaps for the triple A tranche, according to people with direct knowledge of the deal. 

This was increased to 1.65 percentage points before the banks gave up and now face holding the loan on their balance sheets. 

The banks and Blackstone declined to comment. 

MGM Growth Properties did not immediately respond to a request for comment.

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