CMBS: SOFR introduced in CMBS bonds, but not in underlying loans
admin | January 9, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Freddie Mac became the first to issue commercial mortgage-backed securities linked to the secured overnight financing rate (SOFR), the eventual replacement of LIBOR. The FHMS KF73 is an $850 million deal, where the $200 million AS class has a floating rate coupon of SOFR + 67 bp, and the $565 million AL class has a coupon of 1-month LIBOR + 60 bp. Both the AL and AS tranches have a 9.5-year weighted average life and are guaranteed by Freddie. Although the AS bonds are pegged to SOFR, all of the underlying commercial mortgage loans are tied to 1-month LIBOR. This leaves Freddie managing the basis risk should forward-looking 1-month LIBOR fall relative to the backward-looking 30-day compounded SOFR average; then Freddie would need to cover the shortfall between the LIBOR coupon payments of the underlying collateral and the SOFR-linked payments of the AS tranche of securities. Curiously, there remains a 5.1 bp spread difference between the first AL (2.29713%) and AS (2.24629%) coupons. The historical mean difference between 1-month LIBOR and overnight SOFR is 8.25 bp, and the mean difference between 1-month LIBOR and 30-day compound average SOFR is 15 bp, though the market did not require Freddie to close the gap, according to analysts at Commercial Mortgage Alert. Regulators, issuers and market participants continue to prepare for the end of 2021, when LIBOR is expected to be decommissioned. The GSEs have already adopted fallback contract language which will allow both the underlying loans and the securities to transition to a new benchmark rate, which is expected to be SOFR. The article is available in the 12/20/2019 issue of Commercial Mortgage Alert (subscription required). (CMA, APS)
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.