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August 2, 2007
Recently there has been a great deal of concern about the extreme volatility in the credit markets, widening of credit spreads, and the illiquidity of CMBS paper in the secondary market. These concerns are well founded. We want to explain what is happening, and to assure you that we are closely monitoring the markets and will continue to keep you apprised as things progress.
Over the past five days, there has been a sharp drop in demand from CMBS buyers/investors. This drop has led to illiquidity in the securitized debt market due to the failure of conduit lenders to find buyers for their bonds. As a result, end loan spreads (borrowing costs) have drastically increased, both quickly and somewhat unpredictably. It is difficult to predict exactly how this situation will develop. While several conduit lenders are saying that " breakeven" spreads on newly originated high leverage conduit loans are now approximately 190 bps over like-term treasuries, we do not believe that these numbers should induce panic amongst levered buyers. This is a healthy correction. We believe that reduced volatility will bring transparency back to the market, but will also lead to higher credit spreads going forward.
The good news is that much of the recent increase in credit spreads has been offset by a commensurate drop in treasury yields. The 10-year yield was 4.76% on July 28, 2007, down from 5.00% plus just 10 days prior, so the effect on current end loan total borrowing costs is immaterial. The question remains whether or not this change in credit spreads is secular in nature. Developments over the next several weeks should answer that question. How portfolio lenders will react to this change remains to be seen, although some widening of spreads among life insurance companies is anticipated. The amount of spread increases amongst life insurance companies will be determined as the markets calm down. Many lenders are in a holding period until the markets stabilize. In the meantime, we are actively in the market with several deals, negotiating terms, and are fully prepared to assist you with any and all of your financing needs.
Please call Meredith & Grew’s Capital Markets group with any questions or concerns.
- Seth I Rosen, Vice President
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