Three weeks into the third quarter, two CMBS conduits were priced last week. The $1.2 billion MSC 06-TOP23 transaction priced on Wednesday and the $2 billion BACM 06-3 deal on Thursday. These pricings are the first ones for the month of July, since the last deals that priced prior to these were in the last week of June. The month of June saw a record-setting $24.1 billion in deals, making the initial dearth in July more obvious.
Pricing spreads, on average, continue to recover from some June weakness that filtered into the credit sectors, including CMBS, which was looking at a large pipeline for the month. Specifically, the 10-year triple-A senior class on TOP 23 priced one basis point better than GCCFC 06-GG7, which was the last conduit priced in June. Lower investment grade issues showed further strengthening with BBB+ and BBB' tranches improving five basis points to 65 and 70 basis points over swaps, respectively and
BBB-' in 10 basis points to 105 basis points over swaps. Pricing on the TOP deal was in line to slightly tighter than May's average conduit pricings. Pricing spreads on the BACM issue, however, were slightly weaker compared to the TOP deal.
RBS Greenwich Capital Managing Director Lisa Pendergast believes that spreads on the 10-year benchmark could push through 20 basis points over swaps on relatively light issuance for July and August and generally light dealer inventories. "This notion is advanced further as swaps spreads are at three-year wides, and the liquidity and strong credit performance of the sector become more dear as the market enters the latter half of the year, " Pendergast said.
Roger Lehman, managing director at Merrill Lynch, added that strong demand - helped by increasing rates and wider swap spreads - as well as the light supply in July and August should benefit spreads. He also views any widening episodes such as occurred recently, as buying opportunities as real estate fundamentals remain solid.
Conduit issuance in the third quarter is currently projected at about $27 billion, with half coming in September. This is down from nearly $37 billion in the first quarter and $38 billion in the second quarter. It also suggests that second half issuance is likely to be lower compared to the $75 billion issued in the first half of the year.
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