The commercial mortgage-backed securities market has yet to see the influx of capital it expected from investors gravitating down the credit curve, a move widely forecast after the Department of Labor granted long-awaited exemptions to the 1974 Employees' Retirement Income Security Act, according to BW sister publication Real Estate Finance & Investment. The exemptions, which were approved last year, allow pension funds to invest in credits as low as BBB-. Previously pension funds were restricted from investing in anything below a single-A rating as well as prohibited from investing in financial asset securitization trusts. Anecdotal evidence suggests that although there has been more interest in these securities from investors that previously were barred, there has been nothing along the lines of what was expected (BW, 5/29/00).
There are a number of factors driving this indifference. The performance of the corporate bond market--which at one time offered spreads that were 100 basis points higher than CMBS--has definitely been a factor, says Michael Hoeh, portfolio manager at Dreyfus. "There wasn't an obvious relative value reason to jump into CMBS." Moreover, there has been substantial interest in CMBS for collateralized bond obligations (CBOs), which has kept the credit curve flat at a time when corporate bonds were widening dramatically. In addition, many ERISA-sponsored pension plans were already getting around the restrictions by investing in funds that acquired these securities.
Hoeh sees another culprit being the fact that pension funds tend to be more deliberate and measured before investing in new classes of securities, with many pension funds just getting around to presenting this to their individual boards.
There also is speculation in the market that some managers who are in charge of assets for ERISA-sponsored funds have been quietly investing under the radar screen of their peers. But one investor points out that a trend in acquisitions of certain securities by a particular manager would become apparent. "Subordination (spread) levels are getting skinnier and skinnier," one investor adds. Because a larger portion of deals is rated triple-A, there are less of the higher-yielding, lower-rated bonds to go around.