UBS markets $1.5B of junk CMBS despite demands for higher returns

May 07, 2012 05:30PM

As demand for distressed U.S. commercial assets crescendos, UBS is shopping a pool of failing commercial mortgages with a face value of $1.5 billion, Bloomberg News reported. Bids for the portfolio are due Wednesday.

The move comes on the heels of the Federal Reserve Bank of New York selling assets with a face value of $7.5 billion for a record $5 billion last month. The high price, which exceeded the Fed’s internal valuation of the debt, was fueled by investors desperate for the possibility of higher returns in a landscape of minimal interest rates. The winning bidders, Barclays and Deutsche Bank, broke apart the securities and sold them to smaller investors.

“CMBS is very compelling in an environment where interest rates may remain low for some time,” said Richard Hill, an analyst at Royal Bank of Scotland Group in Stamford, Conn. “There has been a lot of cash on the sidelines that is now being put to work as investors search for higher yielding assets.”

Though the late payments on commercial mortgages packaged as bonds rose past 10 percent for the first time last month, many investors believe the real estate market has hit bottom and significant profit can be wrung from these assets. By contrast, yields on top-ranked commercial-mortgage bonds plummets, and now sit just 1.84 percent above Treasury note returns. [Bloomberg]