06/10/2011

CMBS Spreads Blow Out in Softening Market

Amid weakening conditions in the financial markets, new-issue spreads blew out to the highest level of the year yesterday as Morgan Stanley and Bank of America priced a $1.2 billion multi-borrower offering.

The dealers were forced to boost the spreads on most of the deal’s triple-A bonds by 22-28 bp from initial price guidance. And the final spreads on the subordinate bonds exceeded original price talk by 40-135 bp (see Initial Pricings on Page 28).

Meanwhile, UBS, Deutsche Bank and Ladder Capital began marketing a $2.1 billion offering Tuesday. That transaction, backed by 67 loans on 132 properties, is expected to price next week.

On Wednesday, Morgan Stanley and BofA boosted spread guidance from initial levels on most of the classes. But spreads on two triple-A classes ended up widening slightly more.

For example, a $439.5 million class of long-term senior bonds went out the door at 148 bp over swaps — up from initial price talk in the 120-bp area and updated guidance of 135-145 bp. A $363.5 million tranche of triple-A bonds with a 4.9-year average life weighed in at 147 bp — up from the 125-bp area originally and 130-140 bp on Wednesday. At the other end of the capital stack, triple-B-minus paper priced at a whopping spread of 400 bp, exceeding initial talk by 135 bp and the wider end of revised guidance by 100 bp.

With the exception of Cantor Fitzgerald’s debut offering in April, spreads on the benchmark triple-A classes of new issues hadn’t topped 125 bp since December. That portion of Cantor’s $634.5 million transaction priced at 140 bp. But it was considered an outlier because of the deal’s relatively small size and the issuer’s lack of a track record. Cantor’s triple-B-minus bonds also priced the widest at 325 bp, while no other issuers ponied up more than 315 bp this year.

Market players chalked up the wider-than-expected spreads on the Morgan Stanley-BofA offering to ongoing turmoil in the broader financial markets over the past three weeks. The resulting rise in demand for Treasurys also pushed down yields on benchmark swaps, prompting CMBS buyers to hold out for higher spreads to compensate.

While such spread movements aren’t directly proportional, they can be affected by investors’ minimum-yield requirements for new issues. Ten-year swap rates hit 3.09% yesterday, down from 3.44% when the last two commercial MBS issues priced in late May. Five-year swaps slid by 45 bp over the same stretch, to 1.81%.

Meanwhile, CMBS spreads continued to widen in the secondary market over the past week. Ten-year bonds from the super-senior portion of the benchmark GG-10 transaction changed hands at more than 270 bp on Wednesday, up from 244 bp at the end of last week. But the spread tightened to 255-260 bp yesterday. The GG-10 paper, now rated A1/BBB/AAA by Moody’s, S&P and Fitch, was floated as part of a $7.6 billion offering led by RBS and Goldman Sachs (GS Mortgage Securities Trust, 2007-GG10).

Trading was heavy as bid-list volume for the week topped $2.3 billion through Thursday, up from $1.5 billion for all of last week. That was partly due to a rush of purchases by optimistic hedge fund managers and other so-called “fast-money” buyers.

“When we look back at this period of time, some people may realize it was a missed buying opportunity,” said Harris Trifon, a CMBS analyst at Deutsche.

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