Barring a dramatic change in the corporate environment, vis-a-vis a firming credit outlook, commercial mortgage spreads look to be in fine shape. There is some concern that the supply outlook, expected to be over $7 billion for both September and October, might threaten current levels. Secondary spreads, however, suggest otherwise. Last week's Bank of America offering came at +47 basis points to swaps for the 10-year triple-As, but quickly tightened to +44 bps in the secondary. Spreads have since settled in at +46 bps.
Aside from the high investment-grade product, there has been increasing interest in junk-like tranches as well. Roger Lehman of Merrill Lynch points out that double-Bs have tightened significantly in recent months, while high-yield corporates have been subject to higher default rates and a resulting spread widening. Merrill likes the seasoned vintages, and 1997/1998 has seen heavy demand.
Back to the calendar, there are at least four conduit/fusion deals scheduled for September, totaling $4 billion. Currently, the Salomon Smith Barney/Key Bank offering is premarketing and behind that is a TOP-8 issue via Bear Stearns and Morgan Stanley, a Prudential/Bear deal, a joint JPMC/Wachovia issue, and a fusion transaction via Lehman Brothers and UBS Warburg.
This deal will include the A-note piece of the 1166 Avenue of the Americas single-asset offering from Lehman, which is the one of a few single-assets that have come since last September. The deal totals $147 million and is also in early stages of premarketing. Otherwise, there are three large-loan floaters adding another $2.5 billion to the September calendar expected as well.
