After the recent launch of CMBX. NA.4, spreads on initial trading are wide, market participants noted last week, explaining that the lastest series references riskier commerical mortgage bonds than its predecessors.
"While it may take a few days for spreads to stabilize, we can already see that the CMBX.NA.4 has the widest spreads as well as the steepest capital structure of any of the CMBX series. To us, this obviously indicates that investors feel the CMBX.4 is the most at risk for collateral loss," JPMorgan analysts said in a recent report.
Part of the reason for the spread widening has been a spillover from the ABX indices that are experiencing an even more drastic gapping out of spreads. "A lot of hedge funds are looking at the ABX and thinking that something similar will happen with CMBX," said Ben Logan, managing director, structured finance at Markit, adding that while the credit statistics of this most recent vintage of deals are worse than all the others that have gone before, there have been no actual losses.
A new feature of the CMBX.NA.4 is the addition of an AJ tranche, which is the most subordinate of the AAA-rated tranches. The push for the additional risk came from interest in a tiering between the pure triple-A and the double-A, Logan said. He added that the cash CMBS markets are very much focused around triple-A. "People are comfortable trading that risk in the market and this just adds a little more risk in between triple-A and double-A."
JPMorgan expected the AJ tranche to trade at a spread closer to the double-A rather than triple-A tranche. While in the cash market, AJ bonds have recently traded closer to the senior triple-A than they have to the double-A bond, investors should realize that the risk of loss for an AJ bond is much higher than that of a senior triple-A, JPMorgan said. "Because the initial subordination of the triple-A class is so high, almost senior, even a 10% loss will not cause it to be downgraded."
The seven index tranches contain bonds rated AAA, AJ, AA, A, BBB, BBB- and BB respectively.
The CMBX.NA.4 references a basket of 25 of the most recently issued CMBS deals from the previous six-month period. Each deal is sized over $700 million and secured by at least 50 separate mortgages that are obligations of at least 10 unaffiliated borrowers. No more than 40% of the underlying mortgages can be secured by properties in the same state; and no more than 60% of the properties can be of the same property type. However, California has the highest concentration of properties.
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