CMBS Market Ushers In New Year With Rally
The commercial MBS market rallied again this week as a second conduit deal priced under the new risk-retention rules.
The spreads on six investment-grade classes of the $977.1 million offering (BACM 2017-BNK3) tightened by as much as 10 bp from the initial price guidance released by bookrunners Bank of America, Morgan Stanley and Wells Fargo (see Initial Pricings on Pages 17-18).
The spreads were also well below the levels on the $1.3 billion conduit offering that Citigroup and Deutsche Bank priced last Friday (CD 2017-CD3). The two transactions employed different risk-retention options: BACM used a “vertical” strip, and CD used an “L-shape” strip. But market pros said it was hard to tell the degree to which the varying spreads might have been due to that factor or to broader market conditions.
For example, some buyers viewed CMBS — especially subordinate investment-grade bonds — as cheap relative to corporate bonds. “Everybody is searching for yield, and other sectors have rallied harder and faster lately,” an investor said. “We’re playing catch-up.”
The light supply of CMBS has also been a factor, especially since buysiders are generally armed with fresh allocations and eager to put money to work at the start of the year. Some investors also voiced concerns that the pace of issuance will slow even more in the second half, after borrowers and lenders work through most of the remaining loans in a huge wave of maturing debt that was securitized before the crash.
The benchmark bonds in the BACM offering flew off the shelves yesterday at a spread of 88 bp over swaps, after being shopped at 90-bp area. The spread was also down 2 bp from the 90-bp level on the equivalent long-term, super-senior paper in the CD deal. Those were the first conduit deals to price since December, when the benchmark spread averaged 114 bp.
At the bottom of the investment-grade capital stack, the triple-B-minus bonds in the BACM transaction went out the door at 350 bp — down from price talk of 360-bp area and the corresponding range of 565-575 bp in December. The comparable class of the CD deal priced at 380 bp, but the level has since contracted sharply in the secondary market. As of mid-week, dealers were indicating a willingness to buy those notes at a spread of 360-362 bp and sell them for 350-352 bp.
The federal risk-retention rules, which took effect on Dec. 24, require securitization sponsors to “keep skin in the game” by holding on to 5% of their issues for the long term. An issuer can hold a vertical strip encompassing 5% of each tranche, a 5% horizontal strip at the bottom of the capital stack, or an L-shape strip that combines the first two options. The issuer can also pass off all or part of the retention responsibility to the B-piece buyer, which must hold a horizontal strip. For conduit transactions, the risk-retention piece must effectively be held for the 10-year life of the deal.
In the BACM transaction, Wells, Morgan Stanley and BofA divided and retained a 5% vertical strip in proportion to their collateral contributions. In the CD transaction, Citi and Deutsche retained their pro-rata shares of a 1.9% vertical strip and handed off the 3.1% horizontal portion at the bottom of the stack to KKR.
Market pros are closely watching how the varying risk-retention options fare to determine if one will emerge as providing the best execution.
Meanwhile, Goldman Sachs this week was shopping a $350 million floating-rate offering backed by the senior portion of a $450 million fixed-rate loan on the 935,000-square-foot office building at 485 Lexington Avenue in Midtown Manhattan (GSMS 2017-485L). Goldman originated the 10-year mortgage on Jan. 11 for SL Green Realty of New York.
The price guidance was 95-100 bp over swaps for the triple-A bonds, 115-120 bp on the double-A-minus class and 140-150 bp on the single-A-minus tranche. A Singapore investor advised by Prima Capital is fulfilling the risk-retention requirement by acquiring the $22.5 million junior class, rated BB-/BB+ by S&P and Kroll. The purchase price, equal to at least 5% of the total deal proceeds, will produce a projected yield of 6.75%.