Deutsche Bank analysts say time to short CMBS as retailers ail

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Analysts at Deutsche Bank AG, one of the biggest underwriters of bonds tied to US commercial real estate, say now it’s time to short indexes of the securities. The securities are vulnerable because they are supported by leases from retailers, a lagging part of the economy, wrote Ed Reardon and Simon Mui in a note late Tuesday. A combination of retailer bankruptcies and store closures could lead to faster-than-expected mortgage defaults, in part because long-term pressure from internet competitors is wearing many companies down, the analysts wrote.
Deutsche Bank recommends that investors buy credit default protection on two series of indexes of commercial mortgage bonds: one from 2012, and another from 2013. The Frankfurt-based lender was the biggest underwriter of the securities those years, selling about a fifth of the deals, according to trade publication Commercial Mortgage Alert, so buying protection on the indexes amounts to betting against many of the bonds it sold during that period.
Before the financial crisis, another set of Deutsche Bank employees famously recommended shorting real estate. Traders led by Greg Lippmann bet against residential mortgage bonds, which helped the lender weather the global banking meltdown. His efforts were portrayed in the book and movie “The Big Short.”
In this week’s note, Deutsche Bank advised buying credit default protection on the parts of CMBX indexes that are a single step above junk, known as the BBB- tranches. The CMBX indexes in 2012 and 2013 have larger exposure to retailers than their more recent counterparts.
Analysts and investors have sounded alarms for at least two years about the worsening quality of underwriting for commercial mortgage securities. Federal Reserve Chair Janet Yellen warned in 2015 that the property bond market was becoming overheated. She cautioned about high commercial real estate prices last month as well. Investors at Deutsche Bank’s own asset management unit were among bond investors that met with regulators in late 2014 to share their concerns about underwriters refusing to hire bond graders that didn’t give them the ratings they wanted.

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