08/10/2012

Rally Puts CMBS Values Near Post-Crash High

A commercial MBS rally now into its second month drove up new-issue prices this week to their highest levels since before the market’s spring slump.

The steady rise in bond values was a boon for Cantor Fitzgerald, Deutsche Bank and Ladder Capital, which priced a $1.3 billion multi-borrower transaction on Wednesday (see Initial Pricings on Page 10). The offering was heavily oversubscribed by investors eager to get a piece of the last CMBS issue expected to hit the market before Labor Day.

The $546.3 million benchmark class of super-senior bonds, with a weighted average life of 9.8 years, flew off the shelves with a spread of 112 bp over swaps, down 8 bp from price guidance. That marked a sharp drop from late June, when spreads on long-term super-seniors hit 160 bp, well above the low of 105 bp in early March.

“It’s pretty amazing to think that we were at 160 bp just six weeks ago,” one CMBS trader said. “The market is just ripping tighter every day.”

Another trader added: “We’ve seen a broad-based demand for securitized products in general.”

All of the bonds marketed to investors in this week’s offering went out the door with spreads tighter than price talk. The rest of the super-seniors priced 5 bp tighter than guidance, with the 2.5-year bonds going for 30 bp, the 4.8-year paper for 60 bp and the 7.4-year notes for 100 bp. The double-As priced at 235 bp, down 10 bp from talk, and the single-As went for 335 bp, down 15 bp. The junior triple-As, with 20.1% of subordination, tightened 5 bp from guidance, to 175 bp. The triple-B-plus class priced at 470 bp and the triple-B-minus tranche went for 670 bp, both down 20 bp from talk.

The spread-tightening trend started with senior paper last month and has since extended to investment-grade CMBS with lower ratings. Market pros chalk it up to a broader fixed-income rally that largely stems from a recent lack of dire news about the U.S. economic outlook and the European debt crisis. While financial-market conditions could still turn sour without notice and force CMBS spreads wider, that seems less likely in the near term than it did only a month ago, according to traders and investors.

In fact, some said it’s possible the prevailing spread on new issues of benchmark paper could soon dip below 100 bp over swaps — the lowest level seen so far on a post-crash offering. That could bode well for issuers preparing to float nine multi-borrower offerings of roughly $1 billion each in September and October.

Meanwhile, the slow flow of new deals should help CMBS spreads in the secondary market continue to contract. As of yesterday, Wall Street dealers were generally willing to buy recent issues of long-term, super-senior bonds at spreads of 107-110 bp and sell at 105-107 bp. The prevailing bid-ask spread on such paper was 120-115 bp at the end of last week and 140-135 bp three weeks ago.

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