The recent Commercial Mortgage Securities Association (CMSA) conference in New York was considered successful, not only because of the ample attendance of around 1000, but also for the increased dialogue of hot issues and the inclusion of a borrowers' seminar that gave a new perspective to the industry. The theme was "Navigating Through Uncertain Times," but by the end, the overall impression was that the industry is ship-shape.
A panel that consisted of a representative from each portion of the commercial mortgage market, including an originator, investor, rating agency, servicer, and trustee, gave each participant plenty of opportunity to gripe about service and execution at all levels. Some of what came out of the pointed, yet humorous, talk was about how servicers should be compensated (fee-based or return-based) and also suggested changes to the appraisal methods used by rating agencies to value properties.
While this discussion was a welcome one, it highlighted the lack of marquee issues that drew participants to the two previous CMBS conferences, namely the condition of terrorism insurance last year and the 2001 topic FAS 140. With those types of crucial industry-wide ramifications behind, debate goes back to the inner workings of the markets and the different issues germane to specific players at different places in the securitization process.
The devil you know
There is some consternation about the level of spreads at this point. While the recent Freddie Mac accounting concerns pushed all spread markets wider for a spell, triple-A 10-year spreads hit a new six-year tight of 35 basis points over swaps and triple-Bs are near 100 basis points over swaps, putting the credit curve near the flatter end of its historical range.
Still, there are few alternatives in the market and while defaults and delinquencies are modestly higher over the first half of the year, those concerns pale in comparison to delinquencies in other asset classes. They also do not loom as large, issues-wise, as the possibility of another corporate scandal or the potential impact of Congressional action for the GSEs.
So at this point the devil you know is better than the devil you don't. Spreads are not likely to tighten much further from here, but at the same time, a consistent and palatable issuance calendar should keep spreads from widening.
Sprinting into the quarter's end
A relative-value panel at the CMSA discussed the implications and comfort level with the new "lumpier" conduit structures in the market. Investors noted that while there is more exposure to a particular borrower, especially in the portfolio in aggregate, that the higher concentration of loans to borrowers suggests that underwriters are pushing better credits. Moreover, many of the deals have better underwriting characteristics than non-lumpy deals.
In the table below, the most recent conduit deals are highlighted not only as to their property exposure, but also for the concentration of the top-10 loans and associated DSCR as provided by Standard &Poor's.
The $1.7 billion Credit Suisse First Boston offering, brought via CSFB, Morgan Stanley and Bear Stearns priced on June 17. The $1.8 billion offering saw triple-A spreads come at least at the tight end of talk, if not through talk levels, reflecting the renewed investor interest in the sector.
The Deutsche Bank and ABN Amro-led COMM 2003-LNB1 and Greenwich Capital's self-led conduit were both anticipated to price by last Friday. Wachovia is scheduled for the week of June 23, and there is a Morgan Stanley $900 million large-loan floater out for June business as well.