During the financial crisis, bonds backed by single loans became increasingly scarce as investors gravitated toward securities backed by a group of unrelated loans, but single-borrower deals once again are gaining traction, The Wall Street Journal reported May 21.
In March, a single $310-million loan on a 40-story office tower at 120 Broadway in New York City was packaged into bonds and sold to investors. That deal allowed building owner Silverstein Properties to pay down its debt while also spurring further growth in the singe loan-backed bond market.
The Journal reported that single-borrower deals have reach $12.1 billion so far in 2013, compared to $10.1 billion for all of 2012.
Experts disagree on whether the growth in single-loan deals is a good thing. Edward Shugrue, chief executive of commercial mortgage-backed investor and servicing firm Talmage, LLC, called the trend “disturbing.” He told the Journal, “Investors would be better served if these loans were bundled into billion-dollar transactions with meaningful diversity.”
A spokesperson for ratings firm Standard & Poor’s told the Journal that the “recent increase in single-borrower commercial mortgage-backed securities reflects both investors’ appetite for securitized products with higher yielding assets and borrower demand for long-term finance in a historically low interest rate environment.” The spokesperson added that S&P has not rated several recent deals that have included lower-quality assets, aggressive underwriting and overly optimistic expectations of financial performance.
Recently, ratings firms have taken heat for giving allegedly unjustified high ratings in the past, particularly since they make their money when issuers and banks pay them to rate their debt, something that presents a potential conflict of interest.
The Journal reported that the U.S. Department of Justice and more than a dozen state attorneys general have sued S&P for loosening its rating standards to win business. However, S&P has developed new criteria for rating single loans. The rating must be able to withstand more difficult market conditions, including rising interest rates.
In the fourth quarter of 2012, S&P rated 93.6 percent of single-borrower bonds issued, though it rated none of the three deals issued in the first quarter of the year.