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SecuritizationCMBS

Goldman conduit sees high demand, LA office next on tap

US office buildings_PA_575x375

A conduit CMBS deal from Goldman Sachs in the market this week is drawing strong demand from investors eager to buy the first new commercial mortgage bonds in nearly two months, while Morgan Stanley is looking to draw buyers for a Los Angeles office CMBS with some unique protections.

Goldman Sachs is leading the $771.8m deal, GSMS 2020-GC47, with Citi as co-lead. The transaction offered investors bonds rated down through single-A. The super senior triple-A ‘A-5’class will be sized at $265.69m-$500m, depending on investor demand, and the notes as of Wednesday were being priced at guidance of 145bp-150bp over swaps.

According to Jen Ripper, investment specialist at Penn Mutual Asset Management, the bonds were greeted with strong demand from investors during marketing earlier in the week, with much of the deal having gone subject on Tuesday.

“It is a combination of a lack of supply and cash on the sidelines. There is also limited retail exposure, no hotels and the loans have decent leverage and debt service,” Ripper said.

Karissa McDonough, chief fixed income strategist at People’s United Bank, said that the guidance levels for the deal seem cheap compared with what is being seen in corporate bonds, which saw two months of record issuance in March and April.

“CMBS is one of the cheapest assets in fixed income at this point. The asset class sits somewhere above high yield but has performed so much worse,” said McDonough, adding that this is partly because the CMBS investor base is much smaller, and unlikely to grow in the near term.

The junior B-piece bonds will be held by Prime Finance, a CMBS B-piece investment and commercial real estate lending firm. The deal is rated by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.

Sources said the deal is a reworked version of an offering slated for sale before the coronavirus pandemic froze markets in March. The revived transaction includes several structural and collateral features meant to mitigate risks stemming from the pandemic.

For one, the deal excludes loans tied to the hospitality sector. The absence of hotel loans is a stark contrast to deal composition before the pandemic, when loans backed by hospitality assets comprised 11% of all conduit deals on average. Hotels, once a staple crop for CMBS lenders, are under immense pressure as the economy and travel remain shut down, and lead the way among commercial mortgages transferred to special servicing in the past month.

The pool is also heavily backed by loans on higher quality assets in primary markets. At 72%, the deal has the second highest exposure to loans in prime markets of any in Kroll’s conduit CMBS dataset.

In the single borrower, single asset CMBS market, Morgan Stanley is preparing to issue a $550m deal backed by a loan on the City National Plaza office in Los Angeles. The deal is unique in offering investors the assurance of 12 months of upfront debt service payments from the borrower. According to Fitch, the borrower deposited $13.6m into a reserve account upon closing of the loan, guaranteeing mortgage payments through April 2021.

“This reserve is being structured in light of the global coronavirus pandemic, as borrowers may request temporary payment forbearance,” the Fitch pre-sale report states.

“Office is a little worrisome for me, and single asset office [CMBS] is even harder. I’m not surprised that they would get upfront reserves on debt service in the near term to attract investors,” Ripper said. “But the big story, I think, is going to be what we see in terms of the pipeline of loans going into special servicing.”

The CMBS sector is bracing for a rough few months. According to Fitch, the number of commercial mortgage borrowers requesting relief dipped slightly at the end of April, but the number of defaulted loans transferred to special servicing doubled in the last two weeks of the month, with 218 loans worth $8.4bn transferred. According to the rating agency, 26% of all CMBS borrowers representing $149.2bn have contacted special servicers to explore payment relief options since the crisis began.

Echoing the concerns around office properties, McDonough added:

“I am trying to figure out what the commercial real estate market looks like going forward. If many of us can do the majority of our jobs from home, then there should be a big rethinking of the use of space after this is over.”

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