10/07/2011

Demand Soft for First Pooled Floater in 4 Years

Deutsche Bank struggled this week to drum up enough buyers for the first multi-borrower securitization backed by floating-rate loans in almost four years, amid a weakening market and concerns about the deal’s heavy concentration of hotel loans.

Investors said that Deutsche had lined up buyers for less than half of the senior notes from its $619 million offering yesterday, more than a week after marketing began.

Buysiders speculated that the soft demand would prompt Deutsche to boost the asking spreads on all six classes. But there was no official word yesterday on any change in the initial price guidance, which was released Tuesday.

The offering’s $356.3 million of triple-A notes, with a 1.5-year weighted average life excluding extensions, were being marketed with a spread of 250 bp over one-month Libor. Price talk on the remaining bonds, with a 1.7-year initial term, ranged from 400 bp at the double-A level to 900 bp for the double-Bs.

The collateral consists of seven large loans. Four are backed by single hotels and a fifth by a 46-hotel portfolio. The other two are on mixed-used properties. Investors have been growing concerned that the hotel industry could take another beating as the economy falters.

In addition, potential buyers of the most-junior bonds had concerns about the “shadow ratings” that Moody’s, Fitch and Kroll assigned to the underlying loans. Every mortgage in the collateral pool received a junk rating from at least one of the agencies. “It’s hard enough to sell [the junior classes] in this environment,” one CMBS trader said. “The guys who are thinking about buying at that level really have to look long and hard at these loans.”

There has been one single-borrower floating-rate deal since the CMBS market began reviving in late 2009 — a $425 million offering backed by mortgages on hotels that Blackstone assumed from Columbia Sussex after it defaulted on debt. J.P. Morgan priced that five-class offering on July 28.

Meanwhile, market conditions continued to weaken this week due to persistent worries about the European debt crisis. A lot of CMBS buyers are still avoiding everything but fixed-rate conduit or single-borrower paper issued with triple-A ratings over the last two years — prolonging a trend that took hold almost a month ago.

“The market is in flux right now, and it’s going to stay that way until we get more clarity about what’s going to happen in Europe. Investors are very skittish,” another CMBS trader said. Still another added: “It’s all about Europe now. I haven’t had a real-estate fundamentals discussion with anybody in weeks.”

The result is that only top-tier CMBS from the current generation of mainstream deals held its value in the secondary market this week. Meanwhile, spreads widened by at least 25-50 bp on many junior investment-grade bonds from the same deals. The spread-widening trend was even more pronounced among legacy CMBS.

Benchmark paper from the super-senior portion of recent issues, with 30% of subordination, has been changing hands at 170-180 bp over swaps for three weeks. That compares to about 220 bp for long-term triple-A bonds, with about 18% of credit enhancement, from transactions without a super-senior structure.

The going rate for junior triple-As rose to 350-375 bp by yesterday, while spreads on other “CMBS 2.0” bonds hit 650 bp for double-A paper and 500-550 bp for single-As. But the triple-Bs were hanging in at roughly 750 bp, the same as a week ago.

As for legacy deals, super-senior bonds from the 10-year class of the benchmark GG-10 transaction were trading at 375-385 bp yesterday afternoon, up 20 bp from a week ago. But the spread soared past 400 bp at some points in between. 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).

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