Goldman Sachs Group Inc and Citigroup Inc will sell a $788.5 million commercial mortgage-backed security, according to a term sheet sent to investors, in the largest deal of its kind since volume began crawling back after the financial crisis.
The issue would be the sixth since the CMBS market re-opened in December, but just one of a few that include multiple loans. It is expected to price next week, according to the term sheet obtained by Reuters.
Multi-borrower issues are seen as most important to the $700 billion market, which is facing enormous credit needs. More than $1.2 trillion in commercial property loans will be maturing in the coming years, and it is unclear how many can be helped by CMBS since many are lacking the equity or revenue required under today's more stringent underwriting standards.
About $1 billion in the multi-borrower issues have been sold this year, compared with nothing last year, according to Credit Suisse. The deals neared $190 billion in 2007.
The new CMBS will be sold with an average loan-to-value ratio of 53.7 percent, more conservative than issues during the real estate boom. The debt service coverage ratio of 1.88 is also safer than older issues sold at levels that could not meet routine debt payments without help from interest reserves.
The deal looks like it's going to come pretty tight, but that looks well-deserved, said Paul Norris, head of structured products and a senior portfolio manager at Dwight Asset Management in Burlington, Vermont.
The lack of new issuance and demand for yield by investors has created a supply-demand imbalance that is bolstering all structured securities, he said.
The issuers hired DBRS and Moody's Investors Service to rate the issue, leaving Standard & Poor's conspicuously absent for at least the third such CMBS. Investors speculated terms required by S&P -- which controlled much of the CMBS ratings market in the past -- became more conservative than others' in response to the financial crisis, steering issuers away.
S&P nonetheless has been issuing comments on some deals it is not hired to rate. Some factors on a recent JPMorgan CMBS, such as credit protections, fell short of S&P's archetypical deal, suggesting the rater may have demanded a structure more conservative and costly to the issuer.
Such unsolicited comments are encouraged by the Securities and Exchange Commission, which in June set new rules for disclosure to curb the practice of ratings shopping.
More than three-quarters of the Goldman-Citi CMBS is supported by retail properties, including a $100 million loan on New York City's 660 Madison Avenue, home of upscale department store Barneys New York.
Office, industrial and leased land make up the balance of the collateral.
Like other new issues, the bond is expected by investors to price at a premium to outstanding CMBS more vulnerable to the rising defaults plaguing the industry. Top, triple-A rated classes could garner yields 1.3 percentage points to 1.45 percentage points above a common interest rate benchmark, according to two investors.
(Editing by Dan Grebler)