After a quiet February on the primary front, the March CMBS new-issue calendar has plenty to offer. There are as many as $6-8 billion in conduit transactions planned, spread over as many deals, with two currently making the rounds.
The latest issue, CSFB's $1 billion CKP-1, is backed by loans from PNC Bank, KeyBank, and Column Financial. Along with CSFB, the deal is being brought by McDonald Investments, PNC Capital Markets, and Goldman Sachs. The issue is comprised of 30% multifamily loans, and 50% retail and office space.
The other notable conduit, the joint Bear Stearns/Morgan Stanley TOP-6 issue, is nearer to pricing. Guidance was released last Tuesday, with the 10-year tranche posted at +46 bps over swaps and the five-year at +44 bps. The spread in 10s is in-line with where other TOP (Tier One Paper) issues price prior to Sept. 11 - at +46-47, which were roughly one to 3 bps better than prevailing spreads - and carries similar aggressive credit support at 14.75%. Pricing is expected by Friday March 8 and given the recent dearth in supply, high credit names such as this will attract strong interest. Unlike the CSFB deal, however, agencies will remain out of the picture given there is only a 5.5% multifamily component. Instead, retail (40.6%) and office (33.1%) space contribute the largest asset mix.
Lastly, GMAC has a pair of issues. A single-tenant (Lucent) $180 million is being shopped, as is a $480 million floater via Goldman and Deutsche Bank.
Down the road, other conduit issues are expected, including Lehman Brothers/ UBS Warburg, and JPMorgan/ CIBC deals. Single-asset transactions remain derailed because of the ongoing terrorism insurance issues (see story p. 1) but a couple of large floating-rate deals are coming from Salomon Smith Barney/CDC Capital and Deutsche Bank.
Effect of FAS 94
There was more than one reference to the possible impact the post-Enron fallout will have on the CMBS market. Specifically, FASB is considering a change in the treatment of special purpose vehicles (SPEs), which currently require that at least 3% of the equity of the entity be held by outside interests. This avoids the issue of balance sheet consolidation that would otherwise make it ineligible for off-balance sheet status. The new rule, dubbed FAS 94, would require an increase to a 10% equity stake held outside the SPE. This is likely to have some effect on CBOs, but the final outcome remains uncertain. Of larger note, the bid for triple-B paper by that CBO group looks strained in the near term.
CBO/CDO interest in the mezzanine class of the CMBS market has been a major force in the spread tightening that has occurred since late last year. And while their potential absence from upcoming deals is a possibility, it is the current spread levels of triple-Bs that presents a bigger hurdle. UBS Warburg suggests that BBBs are trading at the best levels since mid-2000.
The spread between triple-As and Bs is currently near 75 basis points, down from recent wides of 110 basis points in late 2001. The single-A to triple-B spread is the tightest since early-2000. As far as CBO buyers are concerned, triple-Bs at 120-125 basis points over swaps are very rich, especially if they are to be included in any arbitrage trade, according to UBS. The richness is mitigated, however, by the lack of supply in the market, suggesting a continued but lessened bid for that credit class.