Investors in traditional private placements are turning more and more to commercial mortgage backed securities to find value amid a private placement market that has been slow to take off in 2008. Though it is no secret that insurance companies, the main investors in private placements, invest a good portion of their funds in CMBS, buyside sources said they are looking at the asset class more this year.
One private placement investor at a large insurance company said he recently bought CMBS paper for the first time in two years. The deal was AA'-rated and carried a spread of 375 basis points. "It's attractive because of the yield, but we would not go lower than double-A," said the buysider.
He said his firm was also planning to sell private placements in order to buy more CMBS paper. Furthermore, that buysider said he is not the only one. "We made [a CMBS trade] in November, and we would do it again," said a separate buysider from a smaller shop.
Though new issue spreads on private placements have widened as much as 100 basis points in the past year, Treasury yields have ratcheted in more than a full percentage point during that time, keeping all-in coupons on private placements roughly the same or even lower. This has left private placement investors searching for relative value, especially in an environment when new issuance has been stunted by a slowdown in the overall financial markets.
At the same time, troubles in the subprime mortgage market over the past year have caused spreads on all things mortgage to gap-out even more than private placements, putting spreads on highly-rated CMBS paper in the high 200 to high 300 basis points over Treasurys range versus spreads in the low- to mid-200s for NAIC-1 private placements, such as the recent placement for IMS Health. The deal's ten-year tranche priced at 235 basis points over the 10-year Treasury.
During a panel discussion at the 2008 private placement conference in Boca Raton, Fla. last month, Scott Hartz, head of U.S. fixed income with John Hancock, said that for 2006, insurance companies invested 69% of their portfolios in public bonds, with 19% in private placements and 12% in commercial mortgages. "I see great relative value [in commercial mortgages] for 2008," he said.
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