NEW YORK, Oct 14 (IFR) - Morgan Stanley sounded the alarm
this week in the CMBS market, saying some recent bonds could
lose as much as 8.9% - enough to leave several layers of
investors wiped out.
The dire warning underscored that the commercial mortgage
bond market is still plagued by some of the same problems that
led to a wave of defaults after the last financial crash.
MS analysts said ballooning debt loads, weak property
financials and razor-thin returns could lead to devastating
They warned that losses on some bonds sold only two years
ago could be as high as 8.9% once wobbling property prices,
rising interest rates and tighter credit conditions take hold.
Even in the base-case model, losses could climb to 8% on
some of the more aggressive deals, Morgan Stanley said in an
open call with market participants on Tuesday.
Those numbers are among the most dire estimates yet for a
key asset class that helps fund office towers, hotels, shopping
malls and other commercial properties.
Outstanding commercial mortgage debt now stands at
US$2.9trn, according to Richard Hill, Morgan Stanley's head of
commercial property debt research.
And refinancing that debt - at likely higher rates - will
only add to the sector's woes.
"There is no more constantly being able to refinance at
lower rates," Hill said on the call.
MORE OF THE SAME?
Many believed the CMBS market had put its worst days behind
it, as some US$370bn of new bonds sold since 2013 have in part
helped refinance old high-leverage debt with less pricy loans.
Lenders vowed to shun slipshod underwriting, new rules
required investors to do their own credit work - rather than
rely on rating agency grades - and the hope was things had
"Doing deals in 2012 and 2013, the view was these were very
pristine deals that were squeaky clean," one hedge fund manager
"But with the passage of time you are starting to see which
deals have weaker properties."
Deals sold in the shadow of the crash were deemed cleaner
because borrowers put more of their own money on the line and
credit rating firms required bigger credit cushions to protect
But properties have buckled in oil-fracking boom towns,
people stopped shopping at many lower-tier malls and a string of
major department chains have been shuttering stores.
New York's Hudson Valley Mall leaned on JC Penney, Macy's
and Sears as their top-roster tenants in late 2010 when Cantor
Commercial Real Estate lent US$52.5m against the property,
according to bond deal documents.
That trio of anchor tenants is now often seen as the
death-knell for any mall, and Kroll Bond Rating Agency is
projecting a near US$40m loss on the loan.
STILL WORSE AHEAD?
Forecasting losses is notoriously difficult, of course, and
Morgan Stanley's latest call is an early warning shot that may
be more grim than others.
But JP Morgan last month adjusted its models to better
predict fallout on CMBS loans that default, and many in the
market think the doomsayers may be right.
"I think 8% is reasonable on some deals," said an analyst at
a rival bank that is also studying potentially higher CMBS
losses but has yet to publish its findings.
Jason Callan, the head of structured products at Columbia
Threadneedle Investments, told IFR that everyone should be
revising their estimates.
He worries that commercial real estate is already late in
the cycle, that central bank policies have caused market
distortions and that weak malls could inflict major damage on
"Now is as good a time as any," Callan said about the need
to study how high losses could climb.
According to Morgan Stanley, the roughly US$500bn CMBS
market has already absorbed cumulative losses of 5.6%, which is
mostly due to soured loans written before the crash.
The bank said its base-case average for losses across bonds
sold in the past six years is now 4.6%, with 2010 deals at a
lower 3.6% average range and 2014 deal at a higher 6.1% average.
To put the figures into a broader context, a 4.6% loss to a
typical CMBS deal would nearly wipe out the entire bottom 5% of
bonds that some investors plan to keep to satisfy risk retention
rules that take hold later this year.
"Our intention was not to say: this is the end-all, be-all.
It's a starting place," Morgan Stanley's Hill said on the
"Not everyone agrees with the findings."
(Reporting by Joy Wiltermuth; Editing by Natalie Harrison and