While the talk surrounding the calendar is about the number of conduits on the list, market demand has not only kept up, it continues to draw spreads tighter. Triple-As are 2 bps narrower on the week, and only tighten down the credit spectrum due to ongoing CDO demand. The next couple of weeks will be the most telling, however, as four conduits make the rounds.
The first deal likely to price is a joint Salomon Smith Barney/ Greenwich Capital transaction dubbed SBM7 2001-C2. Pre-launch talk has the 10-year class at +57 basis points, two basis points wide of the recent First Union deal that came on December 6. The most obvious difference between the issues, and mitigation for the spread concession, is the meager 12.6% multifamily collateral in SSB's issue compared to over 34% for FUNB. This highlights the well-known tale of agency interest in recent conduits with over 30% multifamily weighting.
Behind that issue, CSFB is teaming up with Key Bank once again for a $982 million issue that is expected to price by December 20. Guidance is on tap for Friday, December 14. Closer to the mark, JP Morgan Chase along with CIBC have a $872 million conduit, and MSDW is leading the fifth TOP ("tier one paper") issue of the year. The $1.04 billion transaction consists of four triple-A tranches and is weighted mainly in office (35.3%) and retail properties (28.0%).
Single-A's offer value
According to a recent Lehman Brothers research article, CMBS paper looks cheap to corporates upon some simple investigation. Looking at the year-to-date returns between the CMBS and corporate sectors, commercial mortgages trailed corporates by 63 basis points as of November, mainly because of the 66 basis point underperformance in November. This was the worst performing month for that basis since January, exacerbated by the cheapness of corporates heading into 2001 that made the sector that much more attractive to investors.
Lehman Brothers notes, however, that while (unsecured, investment grade) corporates had the higher excess returns, they also exhibited higher volatility of returns. To illustrate, the firm implemented a simple Sharpe-ratio analysis (excess returns over treasuries divided by the standard deviation of monthly returns) for single- and double-A classes. For 2001, the 58 basis point advantage in excess returns that AA corporates had over CMBS when adjusted for risk, shrunk to just 15 basis points (risk adjustment was 0.53% for CMBS and 0.70% for corporates). For single As, the contrast was stronger. The pre-adjusted excess return number was 120 basis points, and just 35 basis points after accounting for the standard deviation.
When the dismal performance of 2000 is reviewed, CMBS beat corporates in both pre- and post-adjusted numbers. For single-As, returns went from 0.51% for CMBS to 0.79%, and from -0.91% to -1.06% in corporates when adjusted for risk.
Aside from simply adjusting for the higher volatility of risk, Lehman suggests that corporates are not likely to see the same performance in 2002 that was seen in 2001, if for nothing else than pockets of credit risk (e.g. Enron). To try and explain what returns might be, Lehman used a ZV spread instead of excess returns as a proxy to measure possible future performance. Using monthly volatility observed in 2000-01, CMBS should provide higher risk-adjusted returns than comparable corporates in 2002- 49 basis points better for double-As and a 57 basis point advantage for single-As.
For recommendations the firm likes single-A bonds as recent tightening in double-As mitigate their future performance. The 26 basis points spreads between the classes is due to the weakening economy, but with single-As the biggest underperformer in 2001, their spreads may be at cheaper levels than the underlying fundamentals would suggest. Banc of America likes single-As as well, as the sector trades cheap to triple-As.
