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CMA
July 01, 2016  

Conduit Deal Struggles After Brexit Turmoil

The first conduit offering to hit the market in more than a month faced tough sledding this week in the wake of financial-market turmoil caused by the Brexit vote.

Bookrunners Societe Generale and Cantor Fitzgerald struggled to line up buyers for the $736.8 million offering, even though it was the only commercial MBS deal being shopped and the broader markets were rebounding from the U.K’s surprising vote to pull out of the European Union.

It was clear yesterday that the spreads would end up far wider than in the last round of conduit issues. The early “whisper” talk suggested that the benchmark class could be offered at a spread of 131-135 bp over swaps — up from the range of 110-125 bp for the previous several transactions. But traders and investors said the dealers would likely have to widen the spread further.

At the other end of the investment-grade capital stack, the whisper talk was 725-bp area on the triple-B-minus class — above the range of 565-690 bp on the corresponding tranches of the previous several issues.

Even after a long marketing campaign that kicked off early last week, SocGen and Cantor never released official price talk. They were close to locking in the spreads late yesterday afternoon. Final pricing was expected this morning.

The results will help determine current conduit pricing levels, especially given the long pause between offerings. But some investors and traders said part of the widening might stem from a deal-specific factor: the absence of collateral from big banks. The transaction (SGCMS 2016-C5) is backed by loans supplied by SocGen, Cantor affiliate CCRE, Natixis, Benefit Street Partners and Silverpeak Real Estate Finance.

“Even if you like the collateral for this deal, people are worried about liquidity because it doesn’t have a major bank sponsor involved,” said one CMBS strategist. Even though Wall Street dealers don’t make markets in their own CMBS paper like they used to, many investors still like to see them on board.

It also didn’t help that the yield on U.S. Treasurys — the base component of CMBS yields — plunged after the Brexit vote. That put upward pressure on CMBS spreads to make up some of the difference, because some investors refuse to buy if yields fall too low.

Meanwhile, the secondary market offered limited guidance on valuations. CMBS trading, which had already been thin, virtually dried up over the past week. “Our market didn’t really react to Brexit,” said one CMBS portfolio manager. “Everyone just hit the bunkers. They all figured, ‘Why bother trading anything at quarter-end with such volatility going on?’ ”

Roughly speaking, the trading of credit-default swaps in the CMBX index indicated that post-Brexit CMBS spreads should be 5-10 bp higher for benchmark paper and 40-50 bp higher on triple-B-minus bonds (see article on Page 7).