JPMorgan Leads $2.9 Billion of Offerings of U.S. Commercial-Mortgage Bonds

JPMorgan Chase & Co. (JPM) is leading banks marketing $2.9 billion of bonds backed by commercial mortgages as relative yields narrow amid investor demand for debt tied to skyscrapers, offices and shopping centers.

The JPMorgan deal consists of 42 loans on 84 properties, said a person with knowledge of the transaction who declined to be identified because terms aren’t public. Wells Fargo & Co. (WFC) and Royal Bank of Scotland Group Plc (RBS) are also selling $1.45 billion of bonds linked to office, mall and hotel loans.

The securities, which may be sold as soon as next week, are being offered as issuance in the $700 billion market accelerates. Banks have arranged $8.6 billion of commercial- mortgage bonds this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales may reach $45 billion in 2011, according to JPMorgan, as investors seek out higher-yielding assets with the Federal Reserve holding its benchmark interest rate at record lows.

“We expect demand to remain strong, and upcoming deals to be generally well-received,” New York-based JPMorgan analysts led by Ed Reardon wrote in a May 13 report. About $4.5 billion of new offerings are in the pipeline for the next two weeks, the analysts said.

The extra yield investors demand to hold top-rated securities linked to commercial real estate has declined to 187 basis points, or 1.87 percentage points, more than Treasuries, from 228 basis points at yearend, according to a Barclays Plc index.

Largest Loan

Money managers are turning to commercial mortgage debt as relative yields on investment-grade corporate debt declined 17 basis points to 149 basis points since Dec. 31, according to Bank of America Merrill Lynch index data. Spreads last month declined to 145 basis points, the smallest gap since October 2007.

“New issue CMBS offer attractive all-in-returns when compared to similarly-rated, duration-matched alternatives,” the JPMorgan analysts said.

The largest loan in the JPMorgan deal is a $199.8 million mortgage on the Newport Centre, a 1.5 million square-foot mall in Jersey City, New Jersey. Macy’s is the largest tenant, occupying 229,889 square-feet. Retail properties account for 41.1 percent of the pool, while office buildings make up 35.6 percent, the person said.

Riskiest Slice

The offering by San Francisco-based Wells Fargo and Edinburgh-based RBS consists of 73 loans on 144 properties, said a separate person, who also declined to be identified because the sale isn’t public.

Torchlight Investors purchased the riskiest slice of the JPMorgan pool, according to deal documents. Selling the so- called B-pieces is a prerequisite for marketing the rest of the deal. The pool of B-piece buyers is growing amid surging sales.

BlackRock Inc., Rialto Capital Management LLC and H/2 Capital Partners dominated the market for so-called B-pieces in 2010. Investors in this portion of commercial-mortgage backed securities can kick out certain loans from the pool if they deem them too risky, thereby policing underwriting standards.

Sales of commercial mortgage-backed securities are a boon for property owners that have struggled to refinance maturing loans amid a dearth of new lending. Sales plummeted to $3.4 billion in 2009, choking off funding to borrowers with maturing loans, according to data compiled by Bloomberg. A record $234 billion of the debt was issued in 2007, the data show.

Source:  Bloomberg


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