Credit Suisse, Deutsche Bank, and Wells Fargo have all taken the unusual step of publicly offering the most subordinate tranches of commercial mortgage securitizations in order to attract a wider investor base.
In some cases, this is paying off better than in others.
Since the financial crisis, only the senior notes of most CMBS have been publicly offered; the junior, or B piece, notes are typically privately placed. A private offering allows sponsors to share additional information about the collateral with B piece investors, who take the first losses when loans go bad.
The trade-off is that fewer investors can participate in a private offering than in a public offering.
Wells Fargo was the one of the first to break with this trend. On April 20, it priced the $955 million WFCM 2015-NXS1, agreeing to pay a spread of 320 basis points over swaps on the B piece, which is rated triple-B minus and has a weighted average life of 10 years. That was 35 basis points tighter than equivalent tranche of the previous conduit to price.
Prior to this, only four CMBS conduits completed post crisis publicly placed B pieces with investors, according to Bank of America Merrill Lynch. This is because offering them privately gives investors “access to additional data to better evaluate the credit quality of a deal, some investors are precluded from or have limited capital available for privately placed bonds,” the bank stated in an April 23 report.
In the report, BofAML analysts attributed the better pricing that Wells achieved to the fact that it was marketed more widely via a public offering. “Some investors are precluded from, or have limited capital available for, investing in privately placed bonds,” the report noted.
Credit Suisse and Deutsche Bank quickly followed Wells Fargo’s example by publicly offering the B pieces of conduit CMBS, but without as much success.
This week, Credit Suisse priced its $1.3 billion C-SAIL conduit, paying swaps plus 330 basis points for the BBB-, 10-year, B piece notes. from its C-SAIL conduit. That’s 10 basis points tighter than the equivalent tranche of Wells Fargo’s deal. Also this week, Deutsche Bank priced the $1.75 billion COMM 2015-CCRE23, paying swaps plus 345 basis points for the B piece, or 25 basis points more than Wells Faro.
Wells Fargo’s most recent conduit had more going for it than a wide investor base, however. The B piece notes also benefited from higher credit enhancement and a lower loan-to-value ratio (LTV) than either the Credit Suisse and Deutsche Bank deals.
Credit Suisse’s deal was rated by Kroll Bond Ratings Agency. The loans used as collateral have a weighted average LTV of 66.2% and the triple-B minus notes benefit from credit enhancement of 7.5%.
Full pricing can be found here.
Deutsche Bank and Cantor Fitzgerald’s COMM 2015-CCRE 23 is rated by Morningstar, Moody’s Investors Service and DBRS. Moody’s, however, only rates the senior notes. The loans in the pool have a weighted average LTV of 55.9%. The triple-B minus tranche benefits of 7.12%.
Full pricing can be found here.
By contrast, Wells Fargo’s conduit was smaller and the pool of collateral has a weighted average LTV of 65.4%. The triple-B minus notes benefit from credit enhancement of 8.3%. DBRS and Fitch Ratings rated the notes. The chart below provided by Trepp shows how the deals compare.
Timing may also have been an issue. Trepp research analysts Sean Barrie said that the swap yield curve shifted between the time three deals priced. “If rates were higher when the WCFM priced, then swap spread would be lower for the same amount of yield,” said Barrie.
“I think it really comes down the credit enhancement though, and possibly the size of the deals,” he added.