01/25/2013

CMBS Spreads Hold Tight Amid Rising Supply

In a bullish sign for the commercial MBS market, the benchmark classes of two commercial MBS transactions priced yesterday at levels that matched the post-crash high achieved earlier this month.

The results indicated that the new high pricing levels are holding as the next wave of supply emerges. That’s good news for securitization programs, whose cost of capital is tied to CMBS prices. As bond spreads decline, Wall Street firms can pass on lower rates to borrowers and thereby improve their competitive position with portfolio lenders.

The two transactions that priced yesterday were a $1.5 billion offering led by Deutsche Bank and Cantor Fitzgerald, and an $859.4 million transaction led by Goldman Sachs and Citigroup (see Initial Pricings on Pages 17-18).

The long-term, super-senior bonds of both multi-borrower offerings were pegged to 72 bp over swaps. That matched both price guidance for those deals and the spread on equivalent paper in the first conduit transaction of the year, a $1.4 billion issue by Morgan Stanley and Bank of America that priced on Jan. 9. The spreads on the other investment-grade classes of the two new deals also roughly matched those of the earlier offering.

Meanwhile, bookrunners RBS and Wells Fargo issued price guidance of 72-bp area for the long-term, super-senior tranche of a $1.4 billion multi-borrower offering that is expected to price today or early next week.

New-issue prices have rallied sharply since the end of June, when the spread for long-term super-seniors hit a yearly high of 160 bp. The benchmark class of the last multi-borrower deal of 2012 priced at 85 bp over swaps on Dec. 12, and then the spread jumped in another 13 bp early this month.

The market seems to have reached an equilibrium, at least for now. This week’s activity suggested that there’s enough demand to soak up the heavy supply of fresh paper, but not enough to cause spreads to tighten further.

“The market is hanging in there, although its depth seems to be a little thinner,” said one CMBS banker. “I think people are happy to take [the new paper]. They’re just not going to push in the spreads.”

Also in the market this week was a $2.5 billion offering backed by a loan to a Centerbridge Partners venture on the Extended Stay Hotel portfolio. The loan is the senior portion of a $3.6 billion refinancing package that J.P. Morgan, Deutsche, Citi, BofA and Goldman recently originated on 680 hotels in the U.S. and Canada.

J.P. Morgan and Deutsche are lead managers on that single-borrower offering, which employs a complicated capital structure. Its fixed- and floating-rate classes were expected to price over several days, starting yesterday and culminating early next week.

As for the RBS-Wells offering, its collateral consists of loans from those two banks and three other lenders: Liberty Island, Basis Real Estate Capital and C-III Commercial Mortgage.

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