With approximately 15 business days left to price new deals and only four fixed-rate conduit transactions still left in the pipeline, some CMBS market participants say that last week's abrupt removal of a $716.3 million GMAC offering might upset the visible supply/demand equilibrium of the market, especially in regard to investors' demand for triple-A paper.
According to market sources, the conduit, GMAC Commercial Mortgage Securities 2001-C3, was pulled last Tuesday due to a technical violation of Securities and Exchange Commission regulations governing the quiet period during which a CMBS deal is being marketed and priced. While an official at Deutsche Bank, a co-lead on the offering, had no comment on the matter, outside sources indicate that a trader at the firm inadvertently sent an internal sales memorandum to one of his standard Microsoft Office lists that included a customer in the transaction.
Insiders say that the customer was involved in one or more of the privately placed parts of the offering and immediately recognized the significance of what he received and contacted Deutsche Bank, who then notified Goldman Sachs and GMAC. The banks collectively resolved to delay the transaction and also informed the SEC of the violation.
For many market players the incident brought to mind the pulling of a $1.37 billion CMBS from Lehman Brothers and UBS Warburg in late March of 2000. In that instance, the deal was removed from the market and delayed more than a month after Warburg executive Brian Harris spoke about the transaction at length, on the record, to Mortgage-Backed Securities Letter, a precursor to ASR (see MBSL 3/27/00 and MBSL 4/03/00). At that time, lawyers for the co-leads were concerned that Harris' statements - which included comments comparing the relative value of the deal to other deals in the market - might be construed as violating SEC laws.
While the current GMAC situation is different, market analysts contend that examining the ramifications of the earlier situation might be a good gauge to determine the length of time that the GMAC deal would be delayed before re-entering the market. "The LB/UBS incident would probably be the best gauge of how long the safety precautions measures would take before this deal goes forward," said a CMBS analyst. "And it is a significant period of time, probably at least 60 calendar days. And then the underwriter has to update all disclosure documents, including the red. It's the updating process that is the problem."
The cancellation and subsequent revival of a deal is a time-consuming matter: Not only are there two sets of remittance reports on all of the loans - which changes the principal factors of the transaction - but rating agencies are liable to revisit the deal. Moreover, the underwriter usually has to recalculate every number on the transaction as well as rewrite the registration and marketing materials.
Furthermore, if an underwriter proceeds with an offering under these circumstances, it gives a free right to all of the initial holders of the security to litigate, should the performance of the bonds disappoint.
"This all takes a lot of time and money," the analyst said. "GMAC can't get this deal done in 2001."
Some market participants suggested that the removal of the GMAC deal and the recent heavy buying of multifamily-concentrated deals by the Agencies could cause CMBS spreads to tighten. After all, the shortage of AAA's has been an issue since Sept. 11, but the situation has been exacerbated by the high multifamily components of two recently priced deals, the $1.035 billion JPMCCMS 01-C1 and the $958.65 million FUNBCM 01-C4.
The JPMorgan deal was 32% multifamily, which meant the triple-A's were not even offered to investors. The FUNB was 34% multifamily, so it is likely that the triple-A's were also bought up by an Agency and hence not widely available. So with two weeks left there are only four fixed-rate conduit deals left for investors to buy triple-A's: CSFB, JPMorgan/CIBC, a Salomon Smith Barney conduit and the TOP5 transaction.
This all points to a somewhat pent-up demand for triple-As, some sources said, but another CMBS strategist made the counterpoint, saying: "While the shortage of triple-A paper could tighten CMBS spreads slightly in the near-term, we don't expect a significant move, as in the last two weeks of the year the market will see four more fixed-rate transactions and CMBS investors have alternative debt products available.
"Specifically, we continue to have a neutral recommendation on triple-A CMBS spreads, given where they price relative to Agencies and swaps."
Another analyst was in agreement, adding that if there was such a pent-up demand, the CMBS basis would be narrowing sharply, and it is not. "We could see a narrowing of spreads, but that's attributed to an improvement in swaps. Not only that, but we are awash in deals. So I am skeptical that the narrowing of spreads is anything other than a swaps-related phenomenon."
Still, last week's FUNB deal certainly benefited from the changed market landscape following the removal of the GMAC deal: all tranches tightened at launch (see story p.15).