Los Angeles – June 30, 2018 – Life insurance companies and pension funds, as part of their overall investment portfolios, hold $475 billion in commercial and multifamily mortgage debt, accounting for 15 percent of the total outstanding. In 2017, life companies lent $80 billion in commercial and multifamily mortgages – a new record and four percent above 2016 levels – growing their portfolios by $40 billion or 9 percent. The long-term nature of commercial and multifamily loans matches well with the long-term nature of many of the liabilities off these companies. And like other capital sources, commercial and multifamily mortgages have performed extremely well for life companies. For most of the past decade-and-a-half, 60+ day delinquency rates have been below 10 basis points. At the end of 2017, just .03 percent of the balance of loans held by life companies were delinquent – 17 out of 33,236 loans. The delinquency rates among retail, hotel/motel and mixed use properties were all 0.00 percent. The archetypal life company loan is larger and more conservative than loans from other capital sources – with an average new loan amount of $22 million and loan-to-value ratio of 59 percent – but that characterization clouds the fact that some life companies specialize in small loans, and many have programs that are able to take on targeted risks in return for higher yields. Given the success of their mortgage portfolios, many life companies have increased the range of their lending and/or partnered with outside capital sources – domestic and foreign – to originate loans.
Conduit issuance picked up toward the end of June with 5 deals pricing for a total of $4.3b, bringing the YTD conduit total to $19.65b across 21 deals. Similarly to May, AAA LCF pricing was in a relatively wide range of S+86-98, with 98 being the widest print so far in 2018 (S+66 was the tight back in January). The AA- bonds priced in a range from 115-145, while the A- bonds priced in a range of 155-210. With four of the five conduit deals coming in the last week and half of June, the variance in spreads reflected investors’ ability to pick and choose amongst the offerings, creating a heavy sense of tiering. The SASB new issue space was very active in June, with 10 deals pricing for $6.8b. This included 5 floating rate deals ($4.4b) and 5 fixed rate deals ($2.4b). In addition, one CRE CLO priced for $470mm, one large loan floater deal priced for $366mm and a small balance deal priced for $278mm. In the secondary market, AAA LCF bonds widened 3-5bps, as the heavy supply in new issue toward the end of the month weighed on spreads. AA- and A- bonds were generally wider by 1-5bps, with only BBB- managing to end the month a touch tighter. Overall though, the mezz market held in well considering the macro backdrop.
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