The March pipeline is rolling out largely as expected, which accounts for the steady spread environment. The pace of a deal-a-week is likely to continue straight through the end of April, allowing if anything some tightening across the credit spectrum.
Triple-As are maintaining mid to high plus 40 basis points to swaps in the 10-year tenor, but with the prospect of light supply, demand for high-grade credit, and the diversification offered by this product, spreads look to tighten further, says Merrill Lynch's Roger Lehman. With similar views on the sector, in addition to the sell-off in Treasuries, Salomon Smith Barney is moving their bias on the sector to a modest overweight from neutral.
Further down in credit, double- and single-A has experienced strong buying interest, driving spreads six and 12 basis points tighter to swaps, respectively, over the past month according to Merrill Lynch. Deutsche Bank notes that at 58 and 72 basis points over, those credits are at tights not seen since December 2000, with demand coming largely from insurance companies. The move has further tightening unlikely, though should benefit from a general tightening in the CMBS sector as noted above, says Lehman.
Still like those credits anyhow? Salomon Smith Barney notes that seasoned mezzanine classes offer some unheralded upside. There is seasoned paper in the double-A and A credits that have credit support better than newly issued triple-As. Rating agencies have been slow to adjust their ratings despite performance records going back three to four years, prompting some investors to jump on before the rating agencies get involved. Given that supply will be moderate, if not drop, in coming months, the lack of new mezz class supply will likely be outstripped by demand, driving spreads tighter.
Salomon also makes reference to a general credit improvement in the market. While there will be increased competition from the corporate debt market for funds as credit improves, they believe that CMBS will benefit from the overall improvement, adding to the spread-tightening bias.
Supply notes
The week of March 18 saw one conduit price, Morgan Stanley's 2002-HQ. The $760 million transaction brought by MSDW, Goldman Sachs, and Salomon Smith Barney priced at or through talk levels for the A3 triple-A tranches on down the credit stack. Better pricing came despite the fact that the top 10 loans comprised of 57% of the pool, as six of those loans were seasoned issues originated by TIAA-CREF and the top ten loans had a low 68.9% S&P LTV, according to Salomon.
Next on tap is a $1.3 billion conduit for Lehman Brothers/UBS Warburg, with Salomon as co-manager. During premarketing one of the triple-A classes was stripped out, leaving four others with WAL from 3.3 to 9.7 years. The deal consists of 36.9% retail and 32.0% office property concentrated mainly in California (31.0%). Guidance has been posted and the issue is on plan to settle sometime during the March 25 week. See the scorecards at the back of the issue for more detail on these transactions.
