The September calendar has a significant number of deals on it, and this is having an impact on spreads. Most recently, the BSCMST 2003-PWR2 deal, led by Bear Stearns, Merrill Lynch and Wells Fargo priced on Wednesday, with triple-As 10-years coming at 40 basis points over Swaps, some of the widest levels seen since April. Behind that, Credit Suisse First Boston printed a $1.3 billion conduit at the same levels on Thursday.
Spreads are about two basis points wider over the last month or so, at least in the secondary market. The Morgan Stanley TOP-11 deal that came at 33 basis points on August 7 is now trading at 35 basis points. This, however, shows a disconnect between primary and secondary spreads. The five basis point concession in new paper provides a buying opportunity, says Merrill's Roger Lehman, though the sizable pipeline this month will keep spreads from moving tighter
There is approximately $7 billion in conduit paper on the calendar this month, including nearly $3 billion in triple-A paper alone. Even with expectations that some of it will be delayed until October, this pipeline is much larger than the $3.5 billion and $4.5 billion that came over July and August, respectively.
With the suggestion that spreads will leak wider or at least hold near current 40 basis point levels, there is some support being built into the structure of the deals. Carve-outs, as seen in the CSFB deal, are a way for the issuer to "customize" some of the issue to attract particular investors. In this case, the multifamily properties are often lifted out of the issue, presumably to get GSEs interested in the offering. This means less triple-As for other investors, translating into a scarcity bid.
Merrill's Lehman notes that some of the deals may participate in a "time-tranching" practice of ripping up the triple-A into multiple maturity classes to meet renewed demand for shorter duration investments. Deals that typically may have been structured in two triple-A tranches of a five- and 10-year maturity, may instead offer at least four tranches under the 10-year bogey.
The chart shows the current pipeline for September.