Fixed rate U.S. conduit issuance in CMBS finished up at $12.62 billion on four deals for the month of October. The deals varied in size from $1.5 to $4.2 billion, with triple-A super senior spreads trading in a range of 21 to 23 basis points over swaps, with the last deal settling in the middle at 22 basis points over. For the month of October, spreads were generally wider in the short to intermediate triple-As and tighter in super seniors and on down the curve to triple-B minus. Perceived lowering of underwriting standards has some in the CMBS community shying away from shorter and intermediate triple-As in favor of longer locked outs as the due diligence necessary to properly analyze the shorter ones has some bypassing this suddenly cheaper sector.
The floating rate sector had four deals totaling $8.52 billion for the month, as new issuance resumed after a light September. In credit default markets, the CMBX's most recent index was launched on Oct. 25. CMBX.2 was rolled out featuring a double-B sub index where none had been offered in the initial index of six months prior (CMBX.1). The double-Bs immediately tightened 16 basis points before the month closed out as strong demand met expectations for the sub IG class.
November/December conduit pipeline growing
Fixed rate deals hit the market as the month was coming to a close, with three in the third week and one the following week. The Morgan Stanley HQ-10 shelf deal was announced late in the month, but will not price until November.
Spreads were fairly stable, never gapping out much on a "pipeline yawn" as demand was sufficient following a heavy September. The widest spread on the super seniors was 23 basis points over swaps, two basis points narrower than the previous month's widening. Production for October was 38% lower than 2005's total for the month. Year to date, however, 2006 is 9.7% ahead of last year's record issuance in domestic fixed-rate volume. Last year did feature a heavy December, as over $21 billion was priced and booked into year-end league tables. Preliminary estimates keep increasing from previous forecasts as a new combined balance for the remaining two months now ranges between $30 to $35 billion from an earlier reported lower total. That would place the 2006 final figure at over $150 billion, far surpassing the old domestic record by roughly $15 billion, or around 11%.
Triple-B fuelled by CDO players
Floating-rate issuance is already ahead of last year's total for the year by 22%, after a late rush to finish October. Spreads for the month finished wider in the triple-As by two to three basis points, and tighter in the remaining IG classes with triple-Bs tightening the most at negative three basis points on the monthly change. As is the case in fixed rate sector, the credit curve (AAA'/BBB-') has flattened markedly since the year began. Currently, the floating rate spread on the curve is at 70 basis points over swaps (off a 75 basis point over swaps print on the latest triple-B minus), with fixed rate credit curve standing 73 basis points over swaps. Those levels are tighter by 20% and 53%, respectively, since the start of the year as the bid for yieldier paper in CMBS has strengthened with CDO structured finance managers providing the main bid and primary impetus.
The CMBX.2 index launched near the end of the month, as every six months a new credit default protection vehicle is rolled out. The market premiered in March of 2006 with a basket of the 25 largest qualifying CMBS transactions serving as the reference entities. The latest basket is more skewed toward Markit, which works in conjunction with the key CMBS trading desks, acts as administrator, calculator and marketing agent for CMBX. They also administer one for ABS and CDS.
Concern has been written on the Street admonishing the lower credit quality prevalent in the latest series. CMBX.2 generally has higher LTVs, lower DSCRs, a greater percentage of IO loans and fewer investment grade loans, according to Merrill Lynch analysts. Most percentages changes are generally under 1%, with the investment grade loan comparison lower 4.5% on the .2 index/basket. The latest index does contain a double-B exposure, something not easily accessible for some accounts so this may serve as an entry point. The demand for that credit was evident as it opened at 180 and immediately tightened 16 basis points, to its current level of 164. The feature of the index is pay as you go with cash settlement date upon execution: participants who roll forward to CMBX.2 from CMBX.1 pay the coupon differential as the two indices do not have identical coupon rates. Investors can leg out of the old index with the same or different counterparties, much in the same way one legs out an MBS dollar roll matching the front months to close out the current position.
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