Snap-Back CMBS Rally Reverses June Slump

Commercial MBS prices, which slumped sharply last month, have quickly rebounded over the past couple of weeks, providing a much-needed shot in the arm to the sector.

But market pros, noting that conditions remain volatile, cautioned it’s far from clear whether the gains will hold.

On June 28, the benchmark triple-A class of a $1.2 billion conduit deal led by UBS and Barclays priced at 160 bp over swaps. That was 20 bp wider than in a deal three weeks earlier and represented the widest level of the year.

Since then, spreads have more than retraced that ground. Last Friday, Bank of America and Morgan Stanley priced the long-term, super-senior class of a $1.4 billion conduit deal at 135 bp over swaps, after shopping it at 145-150 bp (see Initial Pricings on Page 18). And yesterday, Wells Fargo and RBS were marketing the comparable tranche of a $1.3 billion offering at 130-135 bp.

The rally is being attributed to easing concerns about Europe’s immediate troubles and the U.S. economic outlook. “There are still some bad things going on in Europe, but people are not as focused on it,” said one CMBS trader.

Still, the concerns remain and could surface again at any time, leaving the likelihood of further fluctuations high, traders and investors said.

For now, investors who have sat on the sidelines for months are increasingly eager to put capital to work again. Resigned to the fact that interest rates aren’t likely to rise anytime soon, “they can’t sit on cash anymore,” one trader said.

With more buyers funneling into the CMBS market, issuers no longer have to keep yields at certain minimum levels. When the long-running rally in U.S. Treasurys pushed 10-year government yields below 2%, CMBS buyers initially demanded wider spreads to compensate. Generally, they insisted on a yield of at least 3% on 10-year, super-seniors. But BofA and Morgan Stanley placed such bonds last week at a 2.9% yield.

The Wells-RBS offering, rated by Moody’s, Fitch and Kroll, is backed by 80 loans on 122 properties. Wells contributed 48.6% of the collateral balance, while RBS kicked in 39.5%. The rest came from Liberty Island (5.1%), C-III Commercial Mortgage (5.1%) and Basis Real Estate Capital (1.7%).

Among the other super-senior classes, the price talk was 35-40 bp over swaps on $97 million of 2.9-year bonds, 65-70 bp on $187.7 million of 4.9-year paper and 115-bp area on $96.9 million of 7.2-year notes. No guidance was available on the deal’s only floating-rate class, which consisted of $90 million of 9.4-year bonds.

The $113.8 million of junior triple-As, with 21.3% of subordination, were being shopped yesterday at 195-bp area. A double-A class was being offered at 260-bp area and a single-A tranche at 375-bp area. Those three classes have 9.9-year average lives.

Meanwhile, Goldman Sachs this week was marketing an offering backed by a $625 million loan to General Growth Properties on adjacent Las Vegas retail properties — the Grand Canal Shoppes at the Venetian and the Shoppes at the Palazzo, which encompass 816,000 square feet. The transaction, rated by Moody’s, DBRS and Kroll, has four classes, each with 6.8-year average lives.

Goldman was shopping $478 million of triple-A paper at 130-135 bp over swaps, $76.6 million of double-A-minus paper at 190-bp area, $53.1 million of bonds rated A3/A(low)/A at 225-bp area and $17.4 million of Baa2/BBB(high)/A- notes at 275-bp area.

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