ABCP-land is not the only market where arbitrage conduits face a tricky short-term future. CMBS conduits – which have been the engine behind the spectacular growth in this asset class in both Europe and the US – are also now facing the prospect of a market where the numbers no longer add up.
CMBS conduit programmes pool real estate loans and refinance them in the securitization market – exploiting the spread arbitrage between the two. But with triple-A CMBS spreads in Europe having blown out from around 20 basis points over Libor to 65bp over during the summer (and factoring in sterling Libor itself having gone from 6% on June 30 to 6.8% by Sept 14 – euro Libor went from 4.17% to 4.72% over the same period), the cheap funding on which the arbitrage relies has long gone. "For [recently written] loans originated at very low margins, a CMBS exit in the current environment would crystallize a very material loss," notes Ronan Fox, managing director at Standard & Poor’s.
CMBS conduit businesses have proved highly profitable in recent years, and many banks have rushed to pile into the market, driving margins on the underlying loans themselves to historical lows.
