Problems with the subprime mortgage sector and the shake out in global equities market finally pierced the CMBS armor starting in late February and into the first week of March as dealers had to grapple with waning bid interest in an otherwise sound market. Two new deals priced the week ending March 2 after repeated adjustments to clearing levels to all classes. The fallout in ABX BBB- sector was felt in CMBS recently, with conduit bonds widening out 25 basis points and CMBX credit protection on those same classes gapping 60 to over 70 basis points. Double-Bs were hardest hit as they widened over 100 basis points on the week. The credit curve widened out to 84 basis points over swaps from a recent tight of 62 basis points over. New deals in the market included the two largest CMBS deals ever, with the Wachovia Securities/Artesia WBMCT shelf, totaling almost $8 billion in fixed-rate space.
The secondary market saw several basis points of widening as swaps gapped out a few basis points relative to Treasurys at the end of February and into the first days of March. The widening wasn't only confined to lower IGs, as triple-A super senior benchmarks were out three basis points as well. Bid list activity was heavier than usual as some grabbed profits while they could, while other accounts just dumped spread product altogether.
Agency markets were also active as spreads widened out in line with the rest of the spread world and some new deals were readied in the Ginnie Mae project loan space. Spreads were wider only two basis points in GNR sectors while FNMA DUS was out one to two basis points as well.
In the CMBX space, protection spreads were dramatically wider in the lower classes in sympathy with the ABX fallout while triple-As did come out five to ten basis points. The rolls held in line as CMBX.2 and CMBX.1 were in tune with their respective widening, apparently widening out other markets in sympathy. The underlying credits of commercial real estate remain favorable, but the ramifications from an all out subprime meltdown might be unavoidable in some form.
Private label fixed-fate CMBS
The turmoil in equities and subprime ABS has finally made its way into CMBS cash markets as the two deals that priced March 1 had launch levels repeatedly widened with a final pricing at 26 basis points over swaps on the formerly impenetrable super senior 10-year triple-A benchmark class. The two deals were the Merrill Lynch/Countrywide Securities shelf MLCFC 07-5 ($4.43 billion) and Credit Suisse's CSMC 07-C1 ($3.4 billion). Both widened out as the week deteriorated in swaps and subprime markets and finished two basis points wide from initial guidance. Lower IG classes were hardest hit as the triple-B minus class gapped out to 110 basis points over swaps and triple-Bs were at 90 basis points over swaps on both. These represent the widest levels since last summer when bidders were jet skiing and the supply pipeline was getting ready for a similar vacation.
The $3 billion BSCMS 07-PWR15 deal via Bear Stearns priced recently with SS triple-As pegged at 25 basis points over swaps, triple-Bs. This was slightly better than the original guidance of 26 to 27 basis points over swaps, and one basis point firmer than the previous two deals that priced. However, the lower investment grade classes held to wider levels of 90 basis points over swaps for triple-B and 110 for triple-B minus. This was in-line with guidance and equal to the pricing levels of the deals priced on March 1.
In the market were two of the largest deals in the CMBS fixed-rate sector to date. Wachovia Securities' WBCMT 07-C30 weighs in at $7.9 billion and the Deutsche Bank/Citigroup Global Markets partnership rings it up at $6.5 billion. The timing of issuance weighed against the current climate may serve to delay pricing at these levels. The Wachovia deal was expected to launch and price this week.
The floating rate sector remained silent with nothing on the calendar and secondary flows quiet. Two deals were still viewed on the horizon and as of press time one deal had priced with spreads unchanged on zero price discovery.
The credit default protection market was dramatically wider late February and into the first week of March, as the ABX contagion effect was felt throughout the spread product spectrum. Hardest hit were the lower rated triple-Bs and double-Bs. CBX.1 fared no better than CMBX.2, even adjusting for the perceived tighter credit underwriting standards of the older index. While ABX BBB- was gapping out in a frightening manner, CMBX triple-Bs were out over 50% for the week and double-Bs were wider over 100 basis points. The move placed the cash/credit pickup back in cash's favor on CMBX.2 BBB comparisons. Loan performance was still seen as solid in CRE markets and the move was more psychological than a result of any cracks in the CMBS foundation.
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