The 35 basis points over swaps print on GMAC Commercial Mortgage's May 14 conduit pricing was a record level that came at a time of reduced yield in the market for investors to choose. To add to that, secondary market activity has dropped off precisely at a time when holders of CMBS paper might want to take advantage of these levels in order to book some profits.
But it is the slow pace of new issuance that might cause a holdback by investors at this point. There was another conduit that priced last week (LB-UBS 2003-C3) and one currently being marketed (MSDW 2003-IQ4), but this is a dramatic dropoff in supply, versus the volumes seen in the first quarter.
Aside from the relative-value cheapness in CMBS, there is the concept of strong credits and favorable prepayment structures that are adding fuel to the bid. Lastly, there is a strong crossover bid from corporate investors, especially in low-credit investment-grade tranches. Buying in the triple-B area has brought a rather cheap sector along the credit curve, as much as 10 to15 basis points tighter over a week's period. This takes some of the advantage away from that credit, but it still remains rather cheap to comparable REIT debt.
The most recent pricing was the Lehman Brother/UBS Warburg 2003-C3 conduit, which priced last Tuesday. The $1.34 billion offering saw its 9.8-year A4 class came in at 37 basis points over swaps, versus 35 basis points over for the GMACCM 9.6-year A2 tranche. Unlike the GMACCM offering, LB-UBS had heavy retail interest of 63% versus 38% for GMACCM, and was discounted slightly due to the larger overall deal size. GMACCM 2003-C1 participated in a 20% carve-out of the offering for an undisclosed GSE, reducing the amount available to investors to about $600 million.
Morgan Stanley added a $728 million 2003-IQ4 issue to the calendar last Tuesday. The deal is being brought via joint leads CIBC and Merrill Lynch, but has eight collateral contributors, the largest number for any one deal of the three. At nearly 45%, the collateral is primarily retail property. Price guidance for the MSDW 2003 IQ4, however, was not yet available as of press time last Thursday.
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