As the CMBS market preps for its take off with the upcoming launch of the Deutsche Bank and UBS $2.2 billion CMBS deal, market analysts said that new-issue CMBS will be driven by rising risk appetite, improving economic sentiment and the persistent supply/demand imbalance.
"The market has been closely watching the slew of new issuance for signs of investor demand," said Scott Buchta, head of investment strategy at Braver Stern Securities.
JPMorgan Securities analysts said they expect new-issue spreads to tighten, with new-issue, last cash flow triple-As and triple-Bs tightening to inside of 100 basis points over swaps and 250 basis points over, respectively.
Buchta said that if demand for these new assets is strong, secondary spreads are likely to react favorably to good primary execution.
According to JPMorgan, legacy CMBS will look cheap comparatively and analysts expect benchmark 2007-vintage A4s and AMs to tighten inside of 125 basis points over swaps and 200 basis points over swaps by year-end, respectively.
AJs issued in 2005 and 2006, which currently have the most compelling risk/reward profile are expected to tighten to approximately 300 basis points over.
However, Wells Fargo analysts said they anticipated more spread volatility for 2007 A4 vintages prior vintages as a result of pro forma cash flows and excessive leverage at the loan level.
"Modifications of large loans and appraisal reductions will contribute to sloppy cash flows, which might cause spread volatility even on senior tranches within specific deals," Wells Fargo analysts said in a report. "By comparison, new issue 2010 vintage 10-year triple-A CMBS paper has been trading at spreads near 107 bps over swaps, equating to yields of around 4.4%. "
New-issue 10-year CMBS by comparison have a longer average life than A4s off of 2007 vintage transactions, although Wells Fargo analysts said "it is not that unlikely that some 2007 A4s may be extended due to the proliferation of modifications of overleveraged loans in that vintage."
