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CMA
June 12, 2020  

Short Supply Boosts Pricing of Conduit, CLO

Spreads were tightening sharply on commercial MBS this week, pushed in by strong demand amid a shortage of deals.

KeyBank, Barclays, Societe Generale, Rialto Capital and Natixis were expected to price an $807.8 million conduit offering today, with dealer guidance putting the benchmark spread at 115 bp over swaps (BBCMS 2020-C7). That was 5 bp inside initial “whisper” talk and 30 bp tighter than the last conduit deal, which priced two weeks ago.

Dealers launched marketing on Monday, and by Tuesday every tranche of the offering was oversubscribed by as much as 11 times. Unlike the May 29 transaction, it included a publicly offered triple-B-minus class, rated by Fitch and DBRS Morningstar, that was being talked at 700 bp.

Investors viewed the anticipated pricing as a home run for the issuers, although it was well wide of comparable spreads before the pandemic. The previous issue on the same shelf, C6, achieved a benchmark spread of 80 bp back on Jan. 30, and its triple-B-minus bonds priced at 335 bp.

New-issue and secondary-market spreads have been tightening continuously since the early days of the coronavirus crisis in late March and early April, when the benchmark was being marked at 350 bp. Market participants are predicting that spreads could challenge the 100 bp hurdle in the coming weeks, with only two more deals expected to price before a summer lull in conduit activity. However, growing concern about a spike in new virus cases could derail the trend.

The deals that have priced since the mid-March market disruption were collateralized by loans originated earlier in the year. Market pros are expecting issuers to return in September with deals backed by new loans, assuming market conditions continue to improve. One banker said it could happen earlier, with single-borrower deals leading the way.

“The credit markets are ripping tighter and there seems to be a lot of money that wants to get to work,” he said. “There is not a lot of supply.”

Another investor noted that with the Federal Reserve propping up the corporate bond market, spreads have tightened even further on that paper. “We got left a little behind corporates, with those artificially tightening spreads,” he said. “There are still credit risks in our bonds, but so long as we recover from this, it will take care of itself. Right now, the market appears to be healing itself to an extent.”

Meanwhile, a commercial real estate CLO from MF1 REIT was on its way to pricing today, with oversubscribed tranches and significant tightening. The $820 million static offering, backed entirely by multi-family properties (MF1 2020-FL3), was initially planned for March before being disrupted by the pandemic. MF1 is a joint venture between Berkshire Residential and Limekiln Real Estate. Credit Suisse and J.P. Morgan were running the books.

Initial price guidance put the spread on the triple-A-rated class in the area of 205 bp over one-month Libor, 40 bp tighter than the comparable tranche of a CLO priced on March 29 by DoubleLine Capital. The MF1 deal had tightened markedly from whispers, as broader market sentiment was buoyed by expectations of states beginning to ease social-distancing restrictions.

On deck for next week is a $617.9 million conduit offering from Bank of America, Morgan Stanley and Wells Fargo (BANK 2020-BNK27).