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J.P. Morgan Bows to Duration Risk in New CMBS, Investors Say

By Al Yoon J.P. Morgan Chase & Co. plans to sell about $1.3 billion in commercial mortgage-backed bonds next week that appear to be tailored to address investors' growing concerns about longer-duration securities, according to two investors familiar with the offering. In addition to limiting the size of its top 10-year fixed-rate debt class to about $430 million--smaller than in recent issues--the deal will include about $75 million of seven-year floating-rate notes. The structure acknowledges the reduced demand for 10-year debt, the largest portion of most CMBS. Buyers generally have shied away from 10-year bonds because interest rates have fallen so low that many investors believe they aren't being adequately compensated for the risk of owning such long-term securities. A J.P. Morgan spokesman declined to comment. Overall, investors have expressed concern that senior bonds in several upcoming deals could face a tough sell, Roger Lehman, head of CMBS strategy at Credit Suisse, said in a research note on Thursday. Deutsche Bank and UBS are expected to also sell large CMBS by early July. Softer demand for 10-year debt comes even as risk premiums on new CMBS have climbed this month to about 155 basis points--or 1.55 percentage points--over a benchmark, interest-rate swap rates, from about 125 basis points in May, according to Credit Suisse. Investors and rating firms have also become concerned about looser underwriting standards. Benchmark rates have plunged as global fiscal and economic worries sent investors into safer havens, such as U.S. Treasurys. "With yields so low at the top of the capital stack, there appears to be greater interest in moving down the new issue stack to the mezzanine tranches," Mr. Lehman said, summarizing sentiment from an industry conference earlier this week. J.P. Morgan's decision to offer seven-year floating-rate notes follows the introduction of that type of debt in a similar CMBS priced by Wells Fargo Securities and RBS last week. After a lengthy marketing period, Wells Fargo and RBS also reduced their top, 10-year class and increased the floating-rate class to help complete the sale, according investors briefed by the dealers. Still, that deal included nearly $600 million of 10-year debt. Write to Al Yoon at albert.yoon@dowjones.com

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