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Dow Jones Newswire

New Names Are Moving Up the CMBS Charts

January 12, 2011

By Eliot Brown

As the market for commercial-mortgage-backed securities begins to thaw from a two-year deep freeze, a new pecking order among underwriters is emerging, with J.P. Morgan Chase & Co. (JPM) as the dominant player and onetime market leader Morgan Stanley (MS) not yet on the boards.

The landscape for CMBS has changed drastically since its peak in 2007--when banks churned out $230 billion of loans nationally and underwriters raked in hundreds of millions of dollars in fees. Only $11.6 billion of the securities were issued in the U.S. in 2010 as the commercial real-estate market struggled back to its feet.

But that was still $9 billion more than in 2009 and analysts and bankers are predicting $50 billion of issuances in 2011. The growth reflects stabilizing values in the national commercial real-estate market as well as the low interest-rate environment that has magnified the appeal to investors of the relative high yields of CMBS.

In the next two months alone, an array of firms--some of which are packaging their first loans since 2007--are expecting at least $5 billion in new issues. Those include a Morgan Stanley/Bank of America (BAC) group, a team led by Deutsche Bank (DB, DBK.XE) and UBS (UBS, UBSN.VX), J.P. Morgan, and a group that includes Wells Fargo(WFC) and Royal Bank of Scotland (RBS, RBS.LN), according to people familiar with the deals.

That is great news for commercial property owners who have been starved for capital. To create CMBS, banks make commercial-property loans and then bundle those mortgages into bonds. The growing availability of this credit has helped lift values.

The expanding CMBS business also has set off a scramble among Wall Street firms for underwriting fees. The CMBS units at the traditional leading banks have all been hiring in recent months, while new entrants staffed by former Wall Street executives have emerged, including Ladder Capital and Cantor Fitzgerald.

In this scrum, a different set of players has staked out the position of top lead underwriters. In 2010, for example,J.P. Morgan sold $4.3 billion in CMBS, followed by Deutsche Bank's $2.2 billion and Goldman Sachs's (GS) $1.4 billion, according to the trade publication Commercial Mortgage Alert. These firms survived the downturn in better shape than competitors, enabling them to put their capital at risk making loans.

Meanwhile, some of the top fiddles of the boom years are nowhere to be found. This is partly because firms likeWachovia, Bear Stearns, Merrill Lynch and Lehman Brothers either no longer exist or were absorbed by other banks. But other major players of 2007, like Morgan Stanley and Credit Suisse (CS, CSGN.VX), have yet to lead-manage any issues or are far down the list.

A spokesman for Morgan Stanley said the firm has "deliberately taken a thoughtful and methodical approach to re-entering the CMBS new-issue market." A spokesman for Credit Suisse declined comment.

The intensifying CMBS competition raises the specter that at some point underwriting standards will again erode. At the top of the market, banks were making loans that would only work out if the cash flow of the properties greatly improved.

When the downturn hit, investors who purchased CMBS bonds were hit with tens of billions of dollars of losses. Many of the underwriters got hurt too, because they were unable to sell billions of dollars worth of loans they made as CMBS once the market turned.

Partly because these memories are still vivid, standards for loans have remained relatively conservative thus far. But little has changed in the structure of deals, suggesting there is little to prevent a loosening should the market take off.

"What we're seeing is deals with a lot of structural hairs," says Richard Jones, a partner at the law firm Dechert who works in the CMBS market. "Standards always erode."

The CMBS market first restarted in 2009 in a government-backed transaction completed by Goldman Sachs. J.P. Morgan also took the plunge early and aggressively sought deals with multiple borrowers.

Most of the players who did significant business in the past year kept in place many key players on their CMBS desks even during the downturn. Those that eliminated their shops are now trailing.

"They have to start from scratch because everyone's gone," says Anthony Orso, the onetime head of the CMBS group at Credit Suisse who is now leading Cantor Fitzgerald's new operation.

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