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November 04, 2016  

CMBS Spreads Fall as Issuers Flood Market

Commercial MBS rallied this week amid the heaviest issuance since early last year.

Some $5.2 billion of conduit and single-borrower offerings were on track to price, on top of $3.3 billion last week. That two-week total was the highest since the first two weeks of February 2015, when roughly the same amount was floated.

The flow of deals is projected to remain heavy until early December, as issuers clear their decks of loans before risk-retention guidelines kick in on Christmas Eve. Bond buyers, anticipating a lull in activity early next year, are snapping up paper while they can, according to CMBS traders and investors.

“Once we get through November, there really won’t be much issuance in December, January or February, so people are buying what they can now,” said one portfolio manager. Many of those investors need to redeploy principal returned from the huge wave of pre-crash CMBS deals reaching maturity, he added.

After ranging from 115 bp to 120 bp over swaps since late September, spreads on benchmark classes dropped to a range of 111-117 bp in the three conduit deals that priced by Thursday (see Initial Pricings on Pages 14-17). And yesterday, the benchmark tranche of a fourth conduit offering was close to pricing at the tightest spread of all — 107 bp.

The 111-bp level was recorded on the long-term, super-senior class of a $1.1 billion offering by J.P. Morgan and Deutsche Bank (JPMDB 2016-C4). The spread was 114 bp on the benchmark tranche of a $756.5 million issue by Citigroup, Barclays, Rialto Capital and CCRE (CGCMT 2016-C3). And it was 117 bp on the long-term super-seniors of a $787.5 million offering by CCRE and Societe Generale (CFCRE 2016-C6).

Meanwhile, Wells Fargo, Morgan Stanley and Bank of America were finding strong demand for a $725.6 million conduit offering (MSC 2016-BNK2). The benchmark notes, initially shopped at 109-bp area, are expected to end up at 107 bp at final pricing today. The buy-side preference for that deal reflected its advance compliance with risk-retention requirements. The three banks will retain a total of 5% of each class in the transaction, reflecting their willingness to “eat their own cooking.” The risk-sharing commitment also prompted investors to pay up for the trio’s predecessor transaction — the first test of the risk-retention guidelines, which don’t formally take effect until Dec. 24.

There was no price guidance available yesterday on a fifth conduit transaction that was in the market. The $767.6 million offering (CSAIL 2016-C7) is backed by loans from Credit Suisse, Benefit Street Partners and Silverpeak Real Estate Finance. The benchmark bonds could be shopped at 115-bp area, according to early “whisper” talk from the dealers.

Four single-borrower deals totaling $2.5 billion were also in the market this week. Three were expected to price today, and one is on track to price next week.