Developments across the broader synthetic asset-backed securities market are expected to have an impact on the commercial mortgage-backed securities market in the coming months. Market participants are expecting to see changes in supply and demand, activity and what trades are being done.
One of the expected changes involves an increasing number of synthetic CMBS pools, similar to the offering led by Sorin Capital last year. Attendees at last week's Commercial Mortgage Backed Securities Association's Commercial Real Estate CDO Conference in New York said the bulk of the paper will be from traditional B-piece buyers who already have done extensive due diligence on the underlying credits. Indeed, ARCap is set to road show such a CDO. Hedge funds such as Sorin are also expected to keep making arbitrage plays via the structures.
Attendees also pointed to concerns over how the technicals of the credit-default swap market are overwhelming the strong fundamentals of the commercial real estate market and that mismatch is reflected in credit default swap pricing. Some questioned whether the CMBS market is sophisticated enough to really understand the value of their contracts and if risk is being priced too cheaply at this point. "You've got to question these long-only CDO machines looking to sell all this protection," noted one hedge fund manager.
Some hedge fund attendees also griped that the rating agencies have been slow to adapt their models to allow long/short CDOs, and a few issuers have expressed frustration at the inability to include short buckets in their deals.
