The first commercial mortgage bond deal of the year is expected to be marketed to investors this week, according to sources close to the deal.
The offer is seen as a sign of investors' willingness to tolerate risk, despite the deteriorating fundamentals of commercial real estate, as long as a deal is accompanied by adequate protection and conservative underwriting.
Royal Bank of Scotland, through its real estate advisory business, will offer a $500 million security backed by existing loans that were refinanced and underwritten to stricter guidelines.
The top slice of the deal is expected to be priced similarly to the first post-crisis commercial mortgage-backed security deal, which Developers Diversified Realty brought to market last December.
Market participants expect the deal to attract strong demand as investors look for ways to pick up higher returns when safer investments are trading at unusually low yields and interest rates appear poised to rise.
The new-issue market for commercial mortgage bonds has been quiet since December, when offerings from Bank of America Corp. and JPMorgan Chase & Co. followed the DDR deal in quick succession. Though these two deals were well received by investors, and now trade about 50 basis points tighter than the initial sale price, the deteriorating fundamentals of commercial real estate have cast a shadow over the sector, said Guy LeBas, chief fixed-income strategist at Janney Capital Markets.
Delinquencies continue to rise across all property types as tenants struggle to keep up with rent payments and owners with mortgages.
However, bankers believe they can successfully bundle up the best loans — those involving highly rated borrowers with plenty of skin in the game and prime properties.
The RBS deal, for instance, is said to be backed by about a half-dozen loans to multiple borrowers with multiple property types. It was unclear whether RBS had refinanced these loans or was a conduit for the borrowers to find sources of capital. Market participants expect that new commercial bond offerings this year may be of a similar type, in that they are backed by refinancings of existing loans.
