Investors report Deutsche Bank Securities is getting ready to kick-off the European roadshow this week for Lennar Corp.'s $800 million notional static pool cashflow CMBS backed CDO.
Pricing is anticipated for mid-to-late June. Sources expect the triple-As will be offered in the 48-50 basis point over one-month Libor range.
Although the notional size of the deal is $800 million, only about half of the securities are being offered to investors. The deal is backed by 132 classes of CMBS - a pool of un-rated and double-B rated securities from 22 issues, market sources said. While DBSI is sole books and lead, a handful of co-managers are likely to be listed, as was the case with BlackRock's recent Anthracite CMBS CDO, also via DBSI.
Lennar has a Ba1' senior implied rating from Moody's Investors Service.
Like most dealers, DBSI is bullish on the commercial real estate CDO sector, as was stated in a recent report by the head of CMBS research Richard Parkus. Parkus and CMBS analyst Stephen Schwartz point out that the performance of commercial real estate in these deals exceeds that of other collateral types typically appearing in CDOs.
"This is particularly true of the corporate bond sector, on which rating agencies base their assumptions of expected defaults and losses," the report stated. "Yet subordination levels to the investment grade bonds in commercial real estate CDOs are typically three times higher than those in investment grade corporate CDOs and two times higher than those in ABS CDOs."
DBSI explains that the reason the rating agencies penalize commercial real estate (CRE) CDOs is as a result of their inherent lack of diversity, which requires the sponsor to allocate more credit enhancement to achieve its desired ratings. The rating methodology used on CRE CDOs is almost identical to regular CMBS deals, and very little credit is given for the underlying diversification compared to cashflow ABS or corporate backed CDOs, explained one analyst. A Moody's industry diversification score of nine is common for CRE CDOs, compared to a 22 area average for ABS CDOs.
DBSI stresses that while subordination levels are far higher in CRE CDOs, evidence suggests that losses will be far lower. The firm takes the view that the prospects for CRE CDOs outperforming other sectors (including, possibly, CMBS itself) are high.