Analysts at Bank Of America Merrill Lynch said in a report this week that macro economic events coupled with deteriorating underwriting standards in CMBS and a heavy issuance calendar has led to more tiering in CMBS pricing in recent weeks.
Investors, said the analysts in the report, have more room to be selective and price in weaker underwriting standards and weaker collateral quality. “Previously this year when spreads were tightening, investors capitulated in order to put money to work even if they were concerned with weaker underwriting standards and collateral quality,” said analysts at the bank.
One example of this recent tiering is JP Morgan and Barclay’s $1.1 billion JPMBB 2014-C22 transaction.
JPMorgan and Barclays raised the yield by 20 basis points on the triple-B minus rated portion of their offering last week to swaps plus 345 basis points after initially offering a spread of 325 basis points, according to a Bloomberg report. At that level, the deal ultimately priced 60 basis points wider than the recent tightest BBB minus level of swaps plus 285 basis points for CGCMT 2014-GC23, which priced on July 17.
The CGCMT deal benefited from higher aggregate debt yield as well as a lower LTV than the JPMBB 2014- C22.
A heavy issuance calendar over the next two months is likely to keep spreads from sudden tightening, even if macro-related events stabilize. Analysts at BofAML expect over $10 billion of private label CMBS to be placed in September alone.
“We think CMBS spreads will remain soft through the remainder of the quarter, although we expect higher quality bonds could fare considerably better than lower quality ones,” said analysts in the report.
"While spreads may stabilize if geopolitical tensions begin to ease, we do not expect any material tightening”.