July has been called one of the busiest months in terms of CMBS issuance ever, but as the month comes to a close, market players are saying that the number of deals coming to market is going to trail off come August.
Last week was distinctive in many ways. Aside from the heavy issuance that characterized the week and the one prior, it was also a bit unusual because a single property deal - the Banc of America-led World Trade Center transaction - was issued alongside the conduits. Typically conduit deals come to market before a single-property transaction would. And market players have said that it is remarkable how well these deals were received by investors.
Sources say that the deals were met with good demand because of the amount of money that is coming into the hands of fixed-income investors. With the steep yield curve, there is great incentive for them to transfer assets from the money market into the intermediate part of the curve where CMBS deals usually fall, in the five- to ten-year range.
There has been tremendous yield pick-up, especially for the fixed-rate deals and a flight to the fixed-income side over the last six months; flows into fixed-income mutual funds are up and investors say this is a big part of what's fueling the market.
"There has been relatively light issuance through the year in the mortgage area so many mortgage investors on the insurance side have a lot of assets to put to work," said Michael Hoeh, senior portfolio manager at Dreyfus Corp. "Mortgage issuance has been light the last twelve months compared to the corporate bond market."
As of press time, three deals were priced last week, the Banc of America-led World Trade Center transaction, the JPMorgan/CIBC issue and the Salomon Smith Barney/Greenwich Capital conduit. Guidance on the GE Capital deal was released on Thursday as well.
Investors liked what they saw: "I think the issues that have been brought to market were well underwritten, you don't see a whole lot of hotels and healthcare properties in these pools at all," said one CMBS buysider.
Though investors said that the deals were well diversified and well underwritten, they were indistinctive from one another.
Among the deals that priced recently, investors liked Morgan Stanley Dean Witter's TOP3 the best, which came to market the week before last.
Aside from having top-tier originators, the deal is said to have had a very low percentage of multi-family collateral and is comparatively less leveraged with an average loan-to-value ratio of 60%, which was lower compared to the other deals which had an average of 70% loan-to-value ratio.
With the amount of CMBS in the market, dealers had to price their transactions two to three basis points wider than the deals that priced the previous week.
Though the Salomon/Greenwich conduit, which priced last Wednesday along with the JPMorgan transaction, was one of the deals that had to be priced wider, sources said that the credit levels were better than the issues that priced before it. This is because the pricing differential between the senior notes and the triple-B notes was tighter compared to the other deals.
This has something to do with the fact that the Salomon/Greenwich conduit had both a Standard and Poor's and Moody's Investors Service rating while the other deals carried a Fitch rating along with either a Moody's and a S&P rating.
Fitch ratings have typically been notched by the other two rating agencies.
The SSB/Mass Mutual deal is set to come to market this week.