While commercial mortgage-backed securities analysts had been calling for spreads to tighten further towards year-end, that prospect has become tougher than originally anticipated, mainly because the "big rush" of primary-market issuance that was forecasted at the end of summer has not surfaced yet.
"There are still a few more issues to go [before year-end], and everyone was expecting a big rush in September, but there was $5.5 billion of fixed-rate conduit issuance in September. So then the big rush was expected in October, but only $4 billion of conduits came in October," said Darrell Wheeler, a CMBS researcher at Salomon Smith Barney.
"[They] keep squeezing the toothpaste tube until they squeeze it and evenly space all the product out throughout the year," Wheeler said. "I'm surprised that they've been able to squeeze out as much as they have this year; so the toothpaste tube keeps getting refilled."
Indeed, next month could very well yield another $4 billion in CMBS, with a repeat in December, because "everybody is scraping and looking for product to offer," Wheeler noted. But still, the analyst expects the market to fall short of last year's $57 billion mark. "We won't get there we've been calling for a low year."
Spreads have been fairly stable if a little bit sluggish for CMBS recently, sources said, and people are definitely keeping an eye on corporate spreads more and more.
Four deals from the previous two weeks (including the PNC conduit) all looked very similar, with comparable leverage, sources said. For instance, all four of the conduits were 84% loan-to-value with Moody's Investors Service. They also all had very little hotel exposure.
"There was very little unique about them in any way," a CMBS expert said. In fact, the only major difference was that the Morgan Stanley Dean Witter Life conduit, which priced last week, had seven loans rated investment-grade with Moody's (only two were rated investment-grade by Fitch). Sources noted that the investment-grade loans attracted investors to the lower classes.
As for the most recent deals, the $1.29 billion DLJ conduit did not price by press time, but was reportedly doing great in the market.
"It helps when you have a few co-managers on a deal, as well as a bigger pool," noted a trader. "It should price better than the Bank of America deal."
Some sources implied that the BofA deal was a tougher sell. The 5.75-year landed at 30 basis points to Swaps, the double-A's falling a bit wide.
One market player attributed this to a competing bid in corporate paper.
"There are more corporates that are double-A than triple-A, so I don't think that the turmoil is the corporate market really affects the triple-A CMBS market," said a CMBS veteran. "If anything, it scares more people into it. But as you go down the credit spectrum, there are a lot more corporates available to invest in, so that has an impact on the market."
"Our deal went exceptionally well," said Michael Youngblood, managing director of real estate at Bank of America. "We had hoped that on the strength of the interest shown us that we'd be able to tighten spreads by a basis point or two, but that has not happened.
Youngblood said that BofA's deals have always had the advantage of being underwritten in the same way the bank underwrites loans for its own account, since it has the advantage of being a FDIC-insured and regulated bank. But apart from that the deal had a strong collateral pool as well.
"And it showed in our execution," Youngblood said.