There has been plenty of focus on the new issue calendar of late, mainly because the dearth of supply has left many an investor, and dealer, thirsty for some high-quality names. A sip was given on Oct. 26 with the pricing of the Bank of America conduit, but the glass remains more than half full. What this means for secondary market spreads, however, is being reevaluated as many favorable views are being softened.
Coming into the current supply surplus there was moaning and groaning about the lack of price discovery and liquidity that was blamed for the spread concession in the market. Realized secondary bid list spreads varied widely from what talk was for the sector, so the recently announced conduits were a welcome addition to a market looking for a compass heading. The problem is, commercial investors are looking at the same fast or famine situation seen back in late-spring to early-summer. Spread direction, opined for a tightening just last week by many market participants, seems less clear now. Some $6 billion to $7 billion is expected to hit the market by the Thanksgiving holiday season kick-off and the ride could be a bumpy one.
Some names on the tape for November business include the following: $900 million MDSW/Bear Top-4 (priced 10/31), $1 billion CSFB (priced 11/1), $1.1 billion BoA/FUNB, $1.5 billion Lehman/UBS, $1.1 billion FUNB/ML, $1 billion JPMC/CIBC, $1 billion GMAC/GS, and that's just some of the conduits. Add in the large-loan issues and a few single-asset deals, like the currently-marketing $1.8 billion GGP issue via Lehman and Goldman...you get the idea. A tough mountain to climb, especially in the face of credit concerns and a general spread widening that has been exacerbated by this week's curve rally.
The impact has dealers looking at short-term, medium-term, medium-to-long term, and long-term views, just to name a few. The point is there is a lack of consensus for spreads going forward, save to say that the view for CMBS in 2002 is positive. To give a few prognostications from the Street, the majority are on board for tighter spreads into the end of the year. Investor demand seems assured, and dealer inventories are reportedly light. To boot, liquidity is making great leaps - Salomon Smith Barney notes that the bid/ask window is now two basis points, down from recent five basis points over. Salomon cautions, however, that issuance will be a factor weighing on spreads, as will close scrutiny of the collateral - hotels anyone?- within the deals. They also note that spreads historically do not tighten in the fourth quarter.
Merrill Lynch's Roger Lehman is expecting a range for spreads based on the supply and the fair-value of the sector relative to agencies and pass-throughs. The harbinger for wider levels would be a sustained credit crunch on a wide-scale, cross-market basis. In that case CMBS paper would underperform because it tends to be more credit-sensitive than other markets.