Morgan-BofA Deal Kicks Off Issuance Wave
Morgan Stanley and Bank of America rolled out their latest commercial MBS offering this week in an uncertain market, where it may set pricing benchmarks for the year’s last flurry of issues.
The $1.5 billion multi-borrower offering is expected to price next week. It’s only the second CMBS transaction to feature SEC-registered bonds and a super-senior structure since the market collapsed in 2008. Most, if not all, of the issuers with multi-borrower deals in the near-term pipeline are likely to follow suit as they try to reach the widest possible investor base in a volatile market.
“A lot of folks like the new-school structure, with 30% of credit enhancement on the triple-As,” said one CMBS trader. “You will continue to see those types of deals in this environment, because that makes it more likely they will get enough investors to step up.”
The Morgan-BofA offering is backed by 63 loans on 76 properties, with heavy concentrations in the retail (46.3%) and office (29.7%) sectors. The public portion of the deal, encompassing $1.04 billion of bonds with triple-A ratings from Moody’s and DBRS, has 30% of subordination.
The only other triple-A tranche, totaling $162.3 million, has 19.13% subordination and a weighted average life of 9.8 years. That class and the rest of the subordinate bonds are being offered privately under SEC Rule 144A. Until Deutsche Bank and UBS included public bonds in a $1.7 billion conduit issue that priced a month ago, all post-crash CMBS paper had been issued under Rule 144A.
Other issuers are watching closely to see how the Morgan-BofA offering fares with investors, hoping it will usher in a period of pricing stability following this summer’s blowout in spreads. But as of yesterday, there was little consensus on how spreads on the new deal will shake out. “It’s still difficult to hazard a guess where it will trade,” another trader said. “It’s a soft market . . . but there’s a better tone with a lot of people coming back from vacation.”
Some expect the $291.1 million of 10-year super-senior bonds, with 30% subordination, to be offered at 200-215 bp over swaps. Comparable paper from the most recent Deutsche-UBS transaction was changing hands at about 185 bp this week, down from 200 bp at issuance. New issues generally price at spreads at least 10-15 bp wider than the going rate for similar bonds in the secondary market because a lot more of them must be placed at once.
Meanwhile, some market players speculated that the junior triple-A bonds from the Morgan-BofA offering will go for 325-350 bp. Equivalent bonds from the Deutsche-UBS transaction initially priced at 315 bp.
Five more CMBS issues totaling $5.9 billion are slated to hit the market this month, including three multi-borrower transactions — led by J.P. Morgan (a $1.5 billion issue), Goldman Sachs and Citigroup ($1.4 billion) and Wells Fargo and RBS ($1 billion). The Goldman-Citi offering is a resurrected version of a $1.5 billion deal that priced in late July but had to be canceled after S&P withdrew its ratings. J.P. Morgan and Deutsche also have separate securitizations of large loans in the pipeline, totaling about $1 billion each.
In the secondary market over the last week, spreads have averaged 230 bp on 10-year bonds from the triple-A portions of recent CMBS transactions that didn’t include a super-senior structure. That’s down from a high of 240-245 bp two weeks ago, but still far above the 105-bp level seen in early June — before worsening economic conditions halted a long-running CMBS rally.
Spreads on CMBS issued before the crash also stopped widening in recent days. For example, super-senior bonds from the 10-year class of the benchmark GG-10 transaction were trading at 325-335 bp yesterday afternoon — roughly the same as a week ago. That paper, now rated A1/BBB-/AAA by Moody’s, S&P and Fitch, was issued in a $7.6 billion offering led by RBS and Goldman (GS Mortgage Securities Trust, 2007-GG10).
Secondary trading volume remained light yesterday, but traders said it has been picking up steadily since investors came back from summer vacations and the long holiday weekend. Returning buyers were particularly interested in legacy CMBS with spreads that widened the most in late August, including certain bonds from mezzanine and junior classes that were originally rated triple-A. The revived demand caused the spread on so-called A-M bonds from the GG-9 transaction to contract by about 150 bp over the past week, to the 700-bp area. They were floated via a $6.6 billion transaction that RBS and Goldman brought to market in early 2007.