It’s been a year since I joined the structured finance team. I can’t believe it went by so fast. A year of learning and moving forward. Downgrades, liquidity drawings and agent replacements in the summer, noteholder meetings in autumn, covered bonds and refinancing of old CMBS deals in the new year. Inevitably, this one year mark makes me think how much I’ve changed, and how much I’ve learned in the process. It also makes me think how much the ABS markets and the types of investors in those markets have changed since the emergence of the subprime mortgage crisis and the credit crunch.
I remember myself at 23, walking into a Columbia classroom to find out more about the roots of the subprime mortgage crisis, curious to understand what types of events and behaviors had lead to the mess the global economy was in back in 2009 (admittedly I did so wearing my NYU jumper which might not have been the wisest decision I’ve ever made). What I remember most from that semester (apart from the countless hours on the 1 and 9 Trains to 116th Street), is being told that it would take many years before the ABS markets could ever recover – and that there would be very little new issuance for some time.
And yet I now find myself in London, in 2013, dealing with some new CMBS transactions originated in Europe. Indeed, the new issuance is very limited compared to the pre-crisis volumes. However this does not change the fact that there clearly is still investor appetite for new issuance. Of course, the same way I’ve grown and come to terms with reality in these last few years since I walked into that classroom, the ABS markets have developed too, as have the nature of the underlying asset pools and the requirements of the prospective investors.
The investor base has definitely changed. The special investment vehicles and the banks that heavily invested in the CMBS issuance in the heydays have disappeared from the landscape. The new CMBS issues are driven by investors, who, as the Financial Times put it in a recent article, “are chasing higher yielding assets that have performed well during the crisis”.
The assets pools have also changed. New CMBS issuances mostly feature single loans secured by either prime UK property or German multifamily, given that such loans have demonstrated lower default rates through the crisis.
The rating agencies have really changed. Not only have the pre-existing rating agencies faced criticism and enhanced regulatory supervision by the relevant state and intra-state authorities, but also, as Navigant remarked in a June 2012 report, old CMBS Issuers such as Deutsche Bank, Goldman Sachs, Citigroup and JP Morgan Chase & Co. have turned to newcomers, such as Kroll Bond Ratings Inc. and Morningstar.
Most importantly, what is driving new issuance in most cases is the need to refinance old CMBS transactions. The reality, as Moody’s remarked in their “European CMBS: 2013 Outlook” report is that this year roughly 60 % of the commercial property loans supporting European CMBS will fail to repay on time.
I guess we’ve got a long way to go until the ABS markets are fully transformed and investors and regulatory authorities feel fully confident to support the new ABS products. But I’m certainly interested in finding out what happens next and seeing if CMBS 2.0 is really new and improved enough to get investors to buy more.