07/22/2011

CMBS Spreads Blow Out Again, Roiling Market

The commercial MBS market was dealt another body blow this week when bond spreads widened sharply again.

Dealers struggled to price separate $1.5 billion multi-borrower offerings as investor demand evaporated. The spread on the benchmark triple-A class of an offering led by Wells Fargo and RBS priced yesterday at 170 bp over swaps. That was 35 bp wider than initial price talk and 40 bp wider than the comparable class of the previous transaction. The market was further roiled by investor unease with the subordination levels on the other deal, led by Goldman Sachs and Citigroup (see story above and Initial Pricing on Page 14).

The sharp drop in bond prices further complicates the outlook for CMBS lending. After standing at 105 bp over swaps in early June, triple-A spreads have now widened by 65 bp. That has driven down the value of loans being warehoused by CMBS shops. It has also sharply increased the cost of capital, causing the operations to pull back on lending until conditions become less choppy. Many lenders had been waiting for the two deals this week to assess where things stand, only to find out that the situation has worsened.

CMBS traders said that spooked investors were demanding higher spreads to compensate for the ongoing volatility. They reiterated the usual laundry list of worries that have concerned bond buyers in recent weeks — the European debt crisis, the battle over the U.S. debt ceiling and concerns about a double-dip recession.

“It’s eerily quiet,” said one CMBS trader. “It’s one of the weirdest environments I can remember. There’s just a lack of conviction out there. Trading volumes are off significantly.”

In a twist, the fates of the bond and stock markets diverged this week, with CMBS prices plunging as stocks waged a big rally.

Spreads on senior long-term bonds from recent issues flirted with 100 bp over swaps until a long-running CMBS rally suddenly halted last month. The spreads ballooned out to 140 bp and then contracted back to 130 bp before starting to move out again this month.

In the Wells-RBS deal, rated by Moody’s and Fitch, two of the triple-A classes priced in line with price talk: the 2.5-year tranche at 75 bp over swaps and the 4.8-year class at 145 bp. But the 7.1-year bonds went out the door at 170 bp, up from initial guidance of 145-150 bp.

All of the subordinate tranches, which have 9.9-year terms, also priced substantially wider than talk. The double-As went for 225 bp, up 25 bp. A class rated A2/A+ priced at 350 bp and those with Baa1/A- grades sold for 400 bp — both 50 bp wider than guidance. The triple-B-minus class gapped out by 125 bp, to a whopping 575 bp.

The transaction includes loans contributed by GE Capital.

The other multi-borrower offering, backed by loans from Goldman, Citi and Starwood Property and rated by S&P and Morningstar, is expected to price today. The spreads on that deal were expected to end up even wider because of the flap over subordination levels.

Under a revised structure, there are four senior triple-A classes with a 20% subordination level and a junior triple-A tranche with a 14.5% subordination level. The benchmark $672.5 million class was being pitched yesterday with a spread of 175 bp area. The price talk on the other triple-A classes with 20% of subordination was in the 75-bp area for 2.4-year paper and the 165-bp area each for 4.9-year and 7.4-year notes. The junior triple-A class was being shopped in the 200-bp area.

Goldman and Citi initially rolled out the triple-A classes with 14.5% of subordination, with initial price talk of 80-85 bp area on the 2.4-year bonds and 150-bp area on the rest.

In each of the three subordinate investment-grade classes, which have 10-year terms, price guidance was increased by 25 bp: to 225-250 bp on the AA-/AA+ paper; to 350-375 bp on bonds rated A-/A; and to 500-525 bp on the triple-Bs.

Two single-borrower deals entered the market this week: A $1 billion offering backed by a five-year, fixed-rate loan that Wells, Deutsche Bank and Barclays originated last month on 107 shopping centers that Blackstone bought from Centro Properties; and a $425 million floater that J.P. Morgan originated on 13 hotels that Blackstone assumed from Columbia Sussex of Crestview Hills, Ky.

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