Market Extra: Skyline on sale? Wall Street hits pause on big-city property bond deals as Russian war in Ukraine rattles markets

Wall Street hit pause on several property bond deals this week offering investors slices of the New York City skyline and other big cities as Russia’s intensifying war in Ukraine rattles global financial markets.

The most high-profile deal caught up in recent volatility has been the $1.5 billion financing of Deutsche Bank’s new headquarters in Columbus Circle in Manhattan, which bankers opted to delay after starting to drum up interest from potential investors.

“This transaction was being pre-marketed but was not brought to market,” said Jon Laycock, director of media relations at Deutsche Bank, in a statement. “The deal was postponed because of volatile market conditions but will be executed in due course when conditions are more constructive.”

It’s rare for banks to postpone commercial bond deals outside of extreme circumstances, including the onset of the 2008 global financial crisis or in 2011 when S&P Global made a last-minute review of its bond-rating criteria.

It’s very unusual, not unheard of,” said Jen Ripper, an investment specialist focused on commercial property bonds at Penn Mutual Asset Management, noting that three commercial mortgage deals were reportedly in limbo, in a phone call Friday.

“I would imagine they would wait for a calmer time,” Ripper said. “But I’m not sure when that might be at the moment, given the state of the world situation.”

Russia has intensified its war in Ukraine, threatening to cut it off from international shipping lanes in the south and taking control of a large nuclear power plant on Friday, igniting a fire in the process that has been extinguished.

Wall Street has remained on edge about the conflict’s potential to spread beyond Ukraine’s borders, with more than 1.2 million refugees already fleeing to neighboring countries and as Moscow increasingly feels the financial squeeze of harsh sanctions.

Sparsely used office buildings in the heart of big American cities were a concern already, with bonds backed by such buildings coming under pressure recently.

“Right now, non-trophy offices, particularly in central-business-districts in New York and San Francisco, are out of favor,” said Dave Goodson, head of securitized credit at Voya Investment Management, by phone.

“We need extra spread to play there,” Goodson said. “We don’t see default risks, but we certainly see rocky headlines, including as the pandemic comes to an end and we figure out a more regular semblance of life again. We don’t yet know what that means in terms of back to the office.”

Another delayed commercial property bond deal stems from Pacific Investment Management Co.’s agreement to take New York City-office REIT Columbia Property Trust private, according to Bloomberg News, which earlier this week also reported on the holdup on the bonds tied to Deutsche Bank’s new home.

The delinquency rates on commercial mortgage bonds in the so-called single-asset, single-borrower (SASB) sector have remained low at 1%, according to the Barclays Credit Research team led by Lea Overby, in a weekly client note.

Although, the team also said new issuance volumes have slowed in February and spreads, or the premium paid to investors above risk-free Treasurys
widened about 20-35 basis points across commercial property types, which points to market jitters.

Spreads on big commercial bond deals widen on market jitters

Barclays Research

“In the secondary market, you are getting more interest at wider levels form investors,” Ripper said.

Related: Credit markets still cautiously open to U.S. companies as Russia-Ukraine war escalates

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