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July 15, 2016  

CMBS Spreads Tighten as Sector Firms Up

Amid pent-up demand for fresh paper and improving bond-market conditions, the benchmark classes of three conduit offerings have achieved spreads approaching the tightest level seen this year.

The spreads ranged from 115 bp to 122 bp over swaps, indicating that the sector is regaining its footing after a rocky period. That range was well inside the 138-bp level in the previous conduit offering, which priced two weeks ago following a month-and-a-half hiatus (see Initial Pricings on Pages 16-18).

The new-issue spread on long-term, super-senior notes has fluctuated widely this year amid volatility in the broader bond market, from as high as 173 bp in early March to as low as 110 bp in mid-May. The latest transactions helped re-establish pricing levels — which had been highly uncertain, given that only one conduit deal had priced in the previous eight weeks.

“The whole fixed-income market is tightening, and we’re going along with it,” said one commercial MBS investor. “There’s a lot of demand out there and very little supply.” He added: “Everyone is resigned to the fact that interest rates are going to stay where they are, so there’s not a whole lot of reason not to jump back in.”

Late yesterday afternoon, Wells Fargo, Barclays and UBS launched the pricing of a $1 billion offering (WFCM 2016-C25). The spread on the benchmark class was set at 115 bp over swaps, after the bonds were shopped at 118-bp area. Coupons were scheduled to be set at final pricing today.

Also late yesterday afternoon, Citigroup and Barclays priced the long-term, super-senior class of a $721.2 million conduit offering (CGCMT 2016-P4) at 118 bp, beating the price talk of 122-bp area.

Meanwhile, last Friday, J.P. Morgan and Deutsche Bank priced the benchmark class of a $939.2 million conduit offering (JPMCC 2016-JP2) at 122 bp, down from price talk of 125-bp area.

The lower spread in the WFCM transaction reflected the collateral pool’s slightly higher credit quality, according to traders and investors. They noted, for example, that it included two loans with “shadow” investment-grade ratings. Also, the stressed leverage ratio calculated by Moody’s was 112.6%, versus 117.9% for the CGCMT transaction, which isn’t collateralized by any loans with shadow ratings.

The three transactions fared considerably better than the $736.8 million offering (SGCMS 2016-C5) that Societe Generale and Cantor Fitzgerald struggled to price on July 1, in the wake of financial-market turmoil stemming from the U.K.’s vote to quit the European Union. CMBS pros contended the 138-bp spread on the benchmark class was an outlier that didn’t reflect prevailing CMBS prices.

At the other end of the investment-grade capital stack, triple-B-minus bonds in the JPMCC offering went out the door at a 600-bp spread, down from price talk of 625-bp area. That matched the previous year-to-date low seen in late March. The equivalent class of the WFCM deal launched at a spread of 600 bp, in line with price talk. The triple-B-minus tranche of the CGCMT transaction was pre-placed separately, so pricing was unavailable.

Elsewhere in the new-issue market this week, J.P. Morgan and Goldman Sachs encountered strong demand for the triple-A bonds in a $430 million offering backed by floating-rate debt on Blackstone’s Waldorf Astoria Boca Raton Resort & Club in Boca Raton, Fla. (WABR 2016-BOCA). The senior bonds priced Tuesday at a spread of 135 bp over one-month Libor. That was down from guidance of 140-bp area, based on a minimum weighted average life of 1.9 years.