Credit Suisse California Hotel CMBS Marks First Deal in 6 Years

Credit Suisse Group AG sold its first commercial-mortgage bond since 2008 with a $187 million deal tied to two beach-front hotels in Santa Monica, California.

Switzerland’s second-biggest bank is reentering the market as a surge in sales attracts new entrants, sparking concern lenders are loosening standards amid the competition. Credit Suisse’s last deal was an $887 million transaction in March 2008, according to data compiled by Bloomberg, three months before the market for securities tied to properties from skyscrapers to shopping malls shut down for more than a year in the wake of the financial crisis. 

Wall Street banks are poised to issue more than $100 billion of the debt in 2014 after sales doubled to $80 billion last year, Bloomberg data show. Loans contained in deals sold this year are “substantially weaker” than those backing transactions issued in 2013, Barclays Plc analysts said in a report this month. About $8.4 billion in CMBS has been offered since January.

Almost one-quarter of mortgages in 2013 offerings are based on incomes that are at least 10 percent higher than landlords reported during the previous 12 months, Barclays analysts led by Keerthi Raghavan said in the Feb. 7 report. So-called pro-forma underwriting allowed property owners to pile on more debt during the boom years leading up to the property market crash in 2008 on the assumption that future earnings would be higher.
New Department Zurich-based Credit Suisse, which tried to rebuild its origination team in 2011, fired 50 people in October of that year without completing a deal as Europe’s sovereign debt crisis roiled credit markets. The bank restarted the group again last year.

The lender, ranked by newsletter Commercial Mortgage Alert as the fifth most-active underwriter of CMBS globally when issuance peaked in 2007, is taking a cautious approach to new deals by avoiding the types of transactions that require lenders to hold as much as $1 billion of mortgages on their books for months, according to people with knowledge of its strategy.

This week’s transaction is backed by a mortgage linked to the Shutters on the Beach and the Casa Del Mar in Santa Monica, California, according to Morningstar Inc. Top-ranked securities maturing in seven years were sold to pay 85 basis points, or 0.85 percentage point, more than the one-month London interbank offered rate, according to a person familiar with the sale who asked not to be identified because terms aren’t public.

The Shutters on the Beach and the Casa Del Mar are the only two beachfront properties in Santa Monica, Morningstar said in a report earlier this month. In 2009, during the depths of the recession, revenue at the properties dropped about 19 percent, compared with a decline of 35 percent for comparable hotels, according to Morningstar.

Hotels are one of the most volatile commercial-property types as changes in the economic climate affect them almost immediately with rates resetting every night. In addition to the $183 million mortgage, the properties are carrying $186 million of mezzanine loans, according to Morningstar.

Fitch: U.S. CMBS New Issue Metrics Worsen; Legacy Metrics Improve

The road continues to diverge between new issue and legacy metrics for U.S. CMBS, according to Fitch Ratings in its latest quarterly index report.

New issue metrics continue to decline as the percentage of new issue full and partial interest-only (IO) loans in Fitch-rated transactions rose by five percentage points last quarter. The increase was driven by an approximately four-percentage-point increase in full IO loans. In addition, Fitch-stressed LTVs continued to edge up, while stressed DSCRs were lower.

Meanwhile, metrics of legacy U.S. CMBS improved. Delinquencies in Fitch-rated transactions fell in fourth quarter-2014 (4Q'14), though the rate of declines slowed. This was largely due to a backlog of REO assets, which comprised nearly two-thirds of the index balance. Furthermore, the percentage of loans in special servicing declined again in 4Q'14 to $25.1 billion.

'The wave of upcoming CMBS maturities will begin in 2015, particularly in the second half of the year,' said Managing Director Mary MacNeill. The majority of 2015 loan maturities for Fitch-rated, fixed-rate multiborrower CMBS ($21 billion) are set to come due in 2H'15. Roughly $12 billion comes due in 1H'15 ($3.5 billion in 1Q'15). The majority of the higher-leveraged, peak-vintage loans mature between 2016 and 2017, which totaled $129 billion at YE14, excluding $11 billion that already defaulted and remain outstanding.