In the past two weeks, CMBS spreads gapped out further, as exemplified by the new guidance on the WBCMT deal, which was met with diminished demand.
The recent UBS announcement that it was folding its hedge fund unit Dillon Read Capital (DRC) into its investment banking business. gave many market players more to fret about. Officials from the company said that operating a proprietary trading platform outside the investment bank while managing client money had become too complex and expensive. DRC, which managed over $1 billion in client assets, was seen as a major force in sponsorship of CMBS new issuance, regularly taking down several hundred million in triple-A paper.
The secondary market saw increased bid list activity as a result of the DRC closing. Large blocks of triple-A paper were offered "bid wanted" on the secondary market either indirectly or directly as a result. Spreads overall were about a basis point wider in the long locked-out end, with intermediates unchanged. Shorter maturities were unchanged to maybe a half basis point tighter versus secondary dealer sheets compared with the prior week.
Agency spreads ranged from unchanged to slightly wider as yields backed up across swaps and Treasury curves. With swaps outperforming Treasurys in the long end, D.U.S. had the better week against agency debentures, which were only moderately tighter on the week. Ginnie Mae Project Loans (GNPLs) gave a couple of basis points against a sagging conduit market in longer maturities, while three-year GNPL REMIC classes were wider. New issuance across all CMBS agency markets was quiet.
In the CMBX space, spreads were generally stable even in light of the cash markets' problems. CMBX.2 and CMBX.1 were tighter and, in the absence of specific problems related to their underlying 25 benchmark deals, appear to have found a comfortable pocket of shelter behind the current index, which is out in front to absorb any market storms that might surface.
In private label fixed-rates, the super sized WBCMT 07-C31 began its final journey into pricing as guidance was issued Monday. This deal had been on everyone's radar since April and was originally thought to reach at least $6 billion. Downsizing to the current $5.84 billion might not be such a bad idea given the current landscape for CMBS conduits. Spreads are slightly on the wide side, as the 10-year triple-A super seniors are tentatively seen at 31/32 basis points over the benchmark A4 tranche. The lower IGs are faring worse, as is the norm recently, with BBB'/BBB-'widening another 10-to- 12 basis points on the week.
Supply for the rest of the month and June is expected to be heavy, with over $50 billion yet to surface.
Headaches and delays seem to abound in what was once a staid and almost boring market where tightening spreads were taken for granted. There has not been a pronounced deterioration of commercial real estate fundamentals recently. However, unrealistic cash flow projections seem to have caught up to underwriters even as the pace of issuance has not slowed as a consequence. This has served to fade the bid and reduce sponsorship in general.
Wider than guidance
The floating rate market saw the $2.5 billion COMM 2007-FL14 via Deutsche Bank has finally come to market after several weeks of waiting. Spreads were somewhat wide to initial guidance by four to 15 basis points on double-A to triple-B classes, respectively. The $845 million of CGCMT 2007-FL3 via Citigroup Global Markets started marketing on May 4. Spread levels were seen at eight basis points over Libor on the A1s down to 100 and 175 basis points over Libor on the BBB'/'BBB' classes. Price action in CMBS seems to be uniform in higher IG versus lower IG triple-Bs, whether it be fixed or floater.
Agency CMBS had a relatively uneventful week compared with the conduit and credit protection markets. Over the past two weeks, spreads remained unchanged to slightly wider in shorter maturities. This is a response to yield and swaps curve movements outside this space.
The credit default protection space stabilized somewhat as triple-Bs came in a touch and only double-As were wider week over week. The CMBX.2 and CMBX.1 continue to trade well inside of their newer CMBX.3 counterparts on perceived better underwriting from more seasoned and stringent vintages.
The recent turmoil in cash markets surrounding the exit of Dillon Read Capital, while affecting cash markets, has barely impacted the CMBX space.
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