The CMBS pipeline is a pretty tall order for the rest of the year, especially considering there are only 16 full trading days left before year-end. The calendar is flush with conduit issuance, six deals in all, totaling over $6 billion. This represents nearly 17% of the total 2002 conduit issuance, according to Merrill Lynch & Co. researchers.

As of press time last Thursday, four conduits were in the market. Morgan Stanley is leading a syndicate including Lehman Brothers and Merrill Lynch in a $900 million offering (MSDW 2002-IQ3) that was expected to price last Thursday. Guidance for the issue was at 46 basis points over for the 5-year triple-As and 49 basis points over for the 10s. The 10s were talked a basis point through current secondary spreads.

Behind that, RBS Greenwich Capital was in the process of bringing a $1.2 billion conduit - GCCFC 2002-C1 - along with Lehman and Credit Suisse First Boston, backed 40% by retail property and 30% by office. A CSFB-led $1.2 billion issue had nearly 40% office backing and 26% multifamily exposure. Deutsche Bank Securities and Greenwich rounded out the syndicate.

Lastly, GMAC Commercial Mortgage added a $777 million conduit via Deutsche Bank, Goldman Sachs, and MSDW. This deal was the only one of the four that has over 30% multifamily allocation, suggesting that it may price slightly inside compared with the others.

Note that the sub 30% exposure to multifamily property is a bit conspicuous given the market constraints, due to the 30% threshold for GSE investment. Roger Lehman of Merrill Lynch would not be surprised to see some deals come with an exclusive multifamily tranche to attract agencies, which otherwise would not be involved.

Spreads in triple-A 10s remain at historical wides, with a 49 to 50 basis point over concession currently being quoted. Lehman notes that the 50 basis points area has been a historical buying point in the sector, but does admit that the low 50 basis points area is not out of the question in the short term given the supply. Typically, levels of over 50 basis points or more have lingered for between a couple of weeks to a few months. Spreads this time are expected to contract after year-end.

According to Greenwich Capital's Lisa Pendergast, triple-A 10-year paper is currently fair value to cheap versus swaps, credit cards, debentures and current coupon MBS, but rich to double-A industrials, FNMA DUS and mortgage-related ABS. Lower supply projections for CMBS in 2003 - mainly due to higher borrowing rates and a slowing of the commercial property market - will provide investors with an attractive opportunity to buy the sector early next year, keeping spreads from deteriorating much further from current levels.

Triple Bs at or near a buy

There is still some question as when to pull the trigger on triple-Bs, but there appears to at least be some rallying around the triple-B credits. Spreads are out 32 to 37 basis points since the summer, versus the five to eight basis point widening in triple-As over the same period. Merrill's Lehman views triple-Bs are nearing fair value, balancing the risk of another 10 basis points of widening due to economic uncertainty, against the expectations that the rally in corporate bonds and/or a widening of swap spreads will tighten the sector.

Other support for those credits come from JP Morgan analyst Pat Corcoran, who notes that with triple-Bs now 10 basis points wider than REIT spreads, triple Bs offer the best value since early 2002. Greenwich's Pendergast adds that triple-B CMBS still offer a 37 basis point yield pick up over comparable corporate paper, and the driver for a CMBS versus corporate trade lies with the structure protection, diversification and credit enhancement that CMBS offers.

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