The year has started off quietly, but since the conclusion of the Commercial Mortgage Securities Association's CMBS Investors Conference on Tuesday last week, there is one marquee deal making the rounds. The first out of the gate appears to be the TOP-9 issue from MSDW and friends. The "T"ier "O"ne "P"aper program has been rather successful and is considered to be a benchmark-type issue for the market.
Spreads have been inching tighter since the beginning of the year, boosted by a return of investors from the CMSA conference held in Florida and an overall ongoing interest in this type of collateral. The big difference in 2003 will be added scrutiny of collateral, with particular focus on the lagging economic sectors such as office space. Currently, secondary triple-A 10-year spreads are at 46 basis points over.
The TOP-9 transaction has 33% office exposure, but is led by a 43% retail weighting. Credit enhancement is at 13.75% for triple-A tranches, the lowest on record for this type of deal, at least in recent memory. The last deals to come close were the TOP-8 issue and Lehman Brothers-UBS Warburg conduits from the end of September 2002 at 14.00% coverage that priced at 44 basis points and over 47 basis points over, respectively.
Roger Lehman at Merrill Lynch pointed out that the MSDWC 2000-PRIN deal had a 13.00% subordination rate. The issue was mainly seasoned collateral provided by Principle Life, however, so it is not directly comparable. Overall, Lehman sees conduit credit enhancement stabilizing or going lower this year compared with 2002, as has been the trend over the last seven years.
Near-term supply estimates
Supply for this year is pegged at a range of $62 billion to $74 billion for most dealers. Conduits are expected to keep up their pace as a growing asset class, especially as single-asset transactions have waned after Sept. 11. Instead, larger loans will show up in conduits, making for some top-heavy fusion transactions. The first quarter supply estimates range from $10 billion (JP Morgan), to between $16 billion and $18 billion (Morgan Stanley).
Other things to consider this year are credit and vintage tiering as well as scrutiny of property-type exposure. Last year's hotel concern has been replaced by office properties, as their reaction to last-year's economic slowdown will begin to show up in cash flows this year. Seasoned issues are expected to do well in the secondary market because of the delinquency data available on these loans.
