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A relatively new type of bond once considered even safer than U.S. Treasurys is the latest victim of the nation's distressed office market.
The bonds, called single asset, single borrower bonds, or SASB bonds, are different from traditional CMBS because they are attached to just one property instead of a collection of mortgages. SASB bonds were considered supremely safe bets, and credit-rating agencies initially rated many of them AAA.
But the pandemic exposed the risks of these types of investments, and those effects are becoming clearer now. A Bloomberg analysis of 150 SASB bonds connected to a U.S. office property found that creditors, in many cases, are likely to get only a fraction of their original investment back, and in some instances, “the losses will likely reach all the way up to buyers of the AAA portions of the debt,” Bloomberg reported.
“There will be deals that are horrific, where the AAAs may not be paid off in full and there’s basically no bid for the asset,” TPG Angelo Gordon Head of Structured Credit and Specialty Finance TJ Durkin told Bloomberg. “The investment community thought the real estate would never become obsolete. It ended up being wrong.”
Many SASB bonds were tied to well-located high-rise office buildings, the kind of property that was considered a safe bet before the pandemic but is not so stable in a hybrid-work world. SASB bonds have been tied to 1407 Broadway in New York, the Gas Company Tower in Los Angeles and Chicago’s Aon Center, among others, Bloomberg reported.
Over the summer, the Wall Street Journal reported that the rate of SASB loans at or near default had almost tripled over two years, hitting 8.7% in 2024.
More than a dozen office-linked SASB bonds that were once rated AAA are now quoted below 80 cents on the dollar, “a common market threshold for distress,” according to Bloomberg.
The CMBS market overall and the SASB market in particular have both perked up slightly as 2024 wears on, with sales of new SASB bonds reaching $56B this year, according to Bloomberg. But the damage done to office property values in the last few years has sent many major properties into default, receivership or foreclosure, denting confidence in loans attached to similar properties.
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