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CMA
November 30, 2018  

Tight Supply Propping Up Yields on B-Pieces

Spreads on mezzanine commercial MBS have widened in recent weeks, but B-pieces are bucking the trend.

The below-investment-grade portions of conduit deals are being insulated from the price softening by a combination of tight supply and strong demand.

Since Labor Day, the spreads on triple-B-minus conduit paper have consistently drifted wider, from about 250 bp over swaps to about 310 bp. Normally, movement of that magnitude would push B-piece yields wider, too. About half of a typical conduit B-piece consists of double-B bonds, which tend to move in tandem with triple-Bs.

But sagging conduit issuance has left the B-piece buyers starving for paper. That has kept the pre-loss yields of tradable B-pieces hovering around 15%. And market pros expect those yields to hold for at least the near term.

“It’s a technical thing,” said one dealer. “You would expect yields to go up in a market environment like this, but it’s not going to happen when you have a bunch of B-piece guys who’ve raised money and need to put it to work.”

“It’s super-competitive right now,” added one longtime B-piece investor. “There’s been widening in most of the fixed-income markets, and you would normally expect to see that seep into the B-piece market, and push spreads wider. But that’s not going to happen in this market. Deal flow is down, and people will bid whatever they have to to win a deal.”

The competition is exacerbated by the strong market shares of the three biggest shops — Rialto Capital, KKR and Silverpeak Argentic. The trio walked away with the B-pieces of transactions that accounted for 44.6% of conduit issuance in the first half. That left the remaining players fighting over only a little more than half of the market.