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January 26, 2018  

CMBS Runs With Bulls as Spreads Plummet

It’s not just the stock market that’s roaring.

Commercial MBS spreads have fallen to the tightest level since the financial crisis, driving down the cost of capital for securitization programs.

The rally is in line with surging investor demand in the broader bond market, as well as in equities. “There’s just strong demand across all asset types,” said one trader, noting that bond buyers have fresh annual allocations of capital. “Everyone has a lot of cash to put to work.”

For investors, it also helps that the decrease in spreads has been offset by a spike in long-term Treasury yields, leaving absolute bond yields marginally higher. And those yields remain attractive relative to other structured products.

“Part of what we’re seeing in CMBS is yield-induced, and part of it is demand for fixed-income instruments in general,” said one investor.

If the new pricing levels hold, securitization programs figure to become more competitive with portfolio lenders. Securitization shops base the loan spreads they offer on the spreads achieved on CMBS paper. As CMBS spreads tighten, lenders can pass on lower rates to borrowers.

The post-crash low spread was posted in the first conduit deal of the year — a $1.2 billion offering that Deutsche Bank, J.P. Morgan and Citigroup priced last Friday under their new “Benchmark” brand (BMARK 2018-B1).

The long-term, super-senior class went out the door at 66 bp over swaps — down from price talk of 69 bp and sharply lower than the range of 81-87 bp on comparable classes of the five previous conduit issues, all of which priced last month. The previous post-crash low was 71 bp, set in mid-2014. For much of last year, the benchmark spread ranged from 85-95 bp, although a late-year rally briefly pushed the level as low as 75 bp.

The indications this week were that the benchmark class of the year’s second conduit deal would match the BMARK level. Morgan Stanley, Wells Fargo, Bank of America and NCB set price talk of 66-bp area for the long-term super-seniors of the $1.3 billion offering (BANK 2018-BNK10). The transaction was expected to price today.

Most of the other investment-grade bonds in the BMARK deal also went out the door with spreads that beat price talk. The projected spread tightened the most on the triple-B-minus notes, which went for 305 bp, down from guidance of 315-bp area and sharply lower than the range of 350-425 bp on corresponding paper that was offered for widespread distribution last month (see Initial Pricings on Pages 10-14).

Elsewhere in the new-issue market over the past week, CMBS dealers priced three single-borrower offerings totaling $1.3 billion.

Two other single-borrower transactions were being shopped, including a $471 million offering backed by a floating-rate loan that Goldman Sachs and J.P. Morgan had originated for Starwood Capital of Greenwich, Conn., on 85 InTown Suites extended-stay hotels in 18 states (IHPT 2018-STAY). The mortgage has a three-year term, with two one-year extension options.

The price talk, based on a weighted average life of 2.9 years, ranged from 75-80 bp over Libor for the triple-A class to 375-bp area on the tranche rated “BB (low)” by DBRS.

Also this week, Varde Partners of Minneapolis kicked off the marketing campaign for a $368.1 million commercial real estate CLO (VMC 2018-FL1). Wells is running the books on the multi-borrower offering, which is backed by floating-rate debt that Varde originated on 28 properties of various types in 12 states. The collateral includes 20 “pari-passu” participations, representing 88.9% of the pool balance. Whole loans account for the rest.