With just days left in Q3, there is a flood of new supply making the rounds, much of it expected by Sept. 30. Most of the deals come by way of conduit or fusion-type transactions, offering investors an alternative to the premium-priced triple-A tranches in the secondary. This is one of the reasons spreads have not suffered much in the face of a general spread-widening move experienced by the prepayment-laden mortgage, risk-adjusting agency, and headline-beaten corporate markets.
That said, not is all well with the CMBS market. Roger Lehman of Merrill Lynch notes that while investors are reallocating funds raised through bid lists, there is little new money coming into the sector. This may turn out to be a concern as competition with corporates appears to be on the rise. In the September Thomson Financial/IFR Portfolio Manager Survey, investors were starting to look at the triple-B part of the corporate credit spectrum as a target for future allocations.
Another source of distress could be the ongoing effects of spread widening, says Lehman. "With mounting credit and convexity concerns, it will be tough for CMBS to hold its ground...and may lead spreads to the upper end of our forecasted range." Merrill is targeting the low 50 basis points over swaps as the upper end of the spread range.
For now, anyway, new paper spreads are holding at the lower end of the range. Since the GECMC 2002-2 conduit in early August priced at 45 basis points, spreads moved out by 2 basis points by the time the Salomon Smith Barney/Key Bank deal priced in mid-September. Deals currently in the market reflect those levels plus the recently weaker swap spread market, though that appears to be structure dependent. The Lehman Brothers/UBS Warburg fusion priced Thursday at 49 basis points, which was 3 basis points wider than guidance versus guidance of 45 basis points for the Bear Stearns TOP-8 offering.
One of the likely concerns with LB/UBS is the concentration of loans, which according to observations by Merrill have the top six loans accounting for 50% of the collateral pool, and 17% of the collateral as New York City property offerings, representing two of the top three loans. The TOP-8 issue will feel some market concession pressure as well, but is expected to price at least two basis points through the Lehman/UBS deal due primarily to the conduit structure that investors currently prefer.
Still on the hook for possible September business are the following: two large-loan floaters, one via Banc of America (BALL 2002-FLT2), and one from Deutsche Bank (COMM 2002-FL7). There is the 1166 Avenue of the Americas single-asset still in the pipeline as well.
