After widening in November amid market volatility, spreads on commercial mortgage bonds have reversed course in the primary market, tightening against their benchmarks.
Chalk it up to reduced supply.
Just two conduit deals have come to market so far this month. The second, the $1billion WFCM 2015-P2, priced last week at improved levels compared with the first, CGCMT 2015-GC35, which priced Dec. 1. The super senior, triple-A rated tranche of WFCM 2015-P2 pays 136 basis points over swaps, 4 basis points inside the comparable tranche of CGCMT 2015-GC35.
Further down the capital stack, the single-A tranche of WFCM 2015-P2 pays 290 basis points over swaps, 5 basis points inside the comparable tranche of CGCMT 2015-GC35.
Part of the recent pricing stabilization is a result of sponsors pulling deals from the challenging pricing market. Two conduit deals originally expected to hit the market by year’s end have now been shelved until January, according to Barclays.
In a Dec. 11, report, analysts at Barclays said that the original spread widening in November was attributable, in part, to heavy deal flow combined with a lack of investor demand. Spreads on the last super senior triple-A bonds steadily widened from 125 basis points over swaps in mid-November to 140 basis points in early December.
Some of the spread widening is also attributable to investors’ growing weariness of the weaker loans in CMBS conduit pools. This is causing more loans to be dropped from collateral pools prior to pricing.
Fitch Ratings noted in a report last week that the level of loans dropped has risen considerably in recent deals. In a sample of 28 Fitch-rated deals for the 12-month period ending June 30, 2015, the rating agency observed approximately 1,000 loans that were dropped, representing approximately 30% of the final transaction amount. The majority of these ‘dropped loans’ were under $20 million.
The rating agency is concerned that “the numerous loan drops could indicate a lack of lender due diligence prior to sending the initial loan information to rating agencies and/or B-piece buyers.”
B-piece buyers are removing up to about 20% of loans before issuance, compared with 7% previously, according to Barclays. “While the rate is alarming, at the very least, it shows that B-piece buyers are doing more due diligence in a higher volatility environment than earlier in the year and in 2014, when they could more easily offload the BB-rated tranche soon after issuance,” the Dec. 11 report states.
Private-label CMBS issuance has reached approximately $93.4 billion, year to date, according to figures reported by JP Morgan on Dec. 11; $60.7 billion of that volume is comprised of conduit supply and $30.4 billion of single asset, single borrower supply.