April 1 (Bloomberg) — Royal Bank of Scotland Group Plc is selling bonds backed by commercial mortgages from several borrowers in the first sale of its kind since June 2008, gauging investor demand for the debt amid climbing defaults.
The $309.7 million offering, backed by 81 properties in states from New York to Missouri, includes $240.8 million in top-rated securities, according to people familiar with the sale who declined to be identified because terms are private. Of those properties, 78 are retail sites, the people said.
The new issue highlights a challenge facing Wall Street in reviving the $700 billion market as delinquencies rise and the value of mortgages fluctuates. Unlike other banks working on sales, U.K.-based RBS skirted the risk of holding the debt by not closing the loans as they were being pooled, the people said. RBS bankers have been arranging the deal for several months, they said.
Nobody wants to sit with a huge book of business they havent sold, said John Levy, president of Richmond, Virginia- based real estate investment banking firm John B. Levy & Co. Accumulating this stuff for the long term is a problem. What if the music stops again?
Bank of America Corp., JPMorgan Chase & Co., Deutsche Bank AG, Wells Fargo & Co. and Goldman Sachs Group Inc. are all approaching borrowers with terms for commercial mortgages to be packaged into securities and keeping the loans on their books until theyre sold, according to people familiar with the discussions.
Price Swings
That exposes the banks to risk because they need several months to assemble the mortgages from different borrowers, and its hard to guard against price swings on the debt in the interim, the people said.
In February of 2009, RBS said it would transfer 540 billion pounds ($820 billion) of toxic assets, including commercial property loans, into a new unit to be wound down or sold over three to five years. RBS CEO Stephen Hester said at a Jun. 16 conference that the bank would never lend as much to real estate as we did, because we lent too much.
The largest loan in the new offering is a $77.7 million mortgage on the 1,022,692-square-foot South Plains Mall in Lubbock, Texas, home to J.C. Penney and Dillards. A $72.6 million loan on Four New York Plaza in New York is the second largest. JPMorgan Chase & Co. occupies about 75 percent of the 22-story building.
CMBS Sales
Sales of commercial mortgage-backed securities plummeted to $11.2 billion in 2008 from a record $232.4 billion in 2007 as the credit market seized up, according to data compiled by Bloomberg. Even with U.S. government aid, only $3.04 billion of the bonds were sold last year, the data show. Those sales were backed by loans to a single borrower.
As of the end of February, late payments occurred on about 6.29 percent of commercial mortgages bundled and sold as bonds, more than five times the rate a year ago, according to Fitch Ratings. That figure may climb to 12 percent in 2012, the ratings service said.
Top-rated commercial mortgage-backed securities yield about 2.45 percentage points more than Treasuries, compared with 10.29 percentage points a year ago, according to a Barclays Plc index.
Investor demand for such debt has been strong, and other banks will be watching how the RBS deal sells to set the bar on where to price loans for future offerings, according to James Grady, a managing director at Deutsche Asset Management in New York.
A data point on where investors are interested will help underwriters feel more confident, Grady said.
Previous Issue
The last so-called multiborrower offering for commercial mortgage-backed bonds was a $1.09 billion sale in June 2008 from Bank of America that contained debt on 140 properties, according to a prospectus.
Michael Duvally, a spokesman at Goldman Sachs, couldnt be reached for comment. Brian Marchiony at JPMorgan, John Gallagher at Deutsche Bank and Gabriel Boehmer at Wells Fargo didnt immediately return phone calls seeking comment. Michael Geller, a spokesman at RBS, declined to comment, as did Kerrie McHugh at Bank of America.
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net