Leading into the barrage of CMBS deals that were expected this month, three deals hit in rapid-fire succession on Thursday, Feb. 15 and most priced at or inside of guidance as CMBS spreads barely budged on this first real wave of new production this month. Last week, the sizable GCCFC 2007-GG9 transaction priced inside of those levels and spreads were even tighter on the deal, with the investment-grade curve flattening once again.
The demand was more than sufficient to keep these transactions well oversubscribed, with many investors left wanting more paper as a result. The prior dearth of bonds had left a hunger in buyers that is still reflected in the clearing levels on new deals. No pipeline glut was apparent while the market was waiting for the remaining half dozen deals slated to price for February. Spreads remained strong last week, heading into the end of the month. The pace of issuance seemed well timed, unlike in the past where buyers might have been slightly full coming into issuance-heavy months.
The secondary market leveled off lower as a result of the new pipeline, as the drop from bid wanted in competition came in under the weekly average and seemed likely to lay low for the remainder of the month as a result.
Agency markets perked up a little as one new structured GNMA project loan (GNPL) deal was priced for month-end settlement. The longer class came in tighter to the prevailing market and was well subscribed. Project loans kept pace with conduits in the longer end while losing ground in the shorter classes as conduits tightened dramatically in that space. DUS paper was wider to comparable debentures as swaps lagged Treasurys on the week.
In the CMBX space, protection spreads tightened across the board as the continued ABX drama unfolded against subprime markets as CMBS credit either remained stable or improved altogether.
In a related report, Citigroup Global Markets analysts said that an analysis of the fundamental and technical variations between the CMBX and the ABX, and a simple statistical analysis of their trading histories, showed that the market should not witness a wide-range spillover effect from the ABX to the CMBX. The CMBX might see some widening momentum in the near future, especially if relative value investors view the ABX selloff as a chance to enter into a cross-product trade by selling protection on the ABX and purchasing protection on the CMBX. But buyers who like the quality of the CMBX over that of the ABX should offset this momentum and change positions to the CMBX as some form of a "flight to quality." But in any event, at this time, the market should not really expect a CMBX meltdown similar to the one experienced by the ABX recently, Citigroup analysts said.
Private label fixed-rate CMBS
As mentioned in the beginning, three deals priced on Feb. 15, as Morgan Stanley's $2.4 billion HQ11, Banc of America's $3.18 billion BACM 2007-1, and Lehman Brothers' and UBS's LBUBS $3.5 billion deal completed that day's flurry. Spreads were no worse for wear as the 10-year super senior triple-A tranches held tight at 23 basis points over swaps. That was one basis point inside of guidance and mirrored the rest of the deal structures tightening on down to triple-Bs that are now inside of 90 basis points over swaps context. The shorter triple-As were also garnering much needed support, as the three-year and five-year maturities were inside of 20 basis points over swaps, after taking something of a battering as last year came to a close.
RBS Greenwich Capital/Goldman Sachs priced the GCCFC 2007-GG9 deal on Wednesday, where demand and spread levels were strong, to say the least. The 10-year triple-A super seniors came in at 22 basis points over swaps and the triple-B minus was set at 83 basis points over, flattening the investment grade curve to 61 basis points over. The deal size itself set an issuance record being the first to exceed the $5 billion barrier (actually $6.58 billion). That amount is seen as being surpassed next month as two $7 billion deals were getting readied as the overall commercial real estate market will ultimately witness escalating prices filtering into the securitized syndicated area. The total for February is now seen at approximately $31.8 billion, with those two mammoth deals, originally thought to price this month, apparently being held out until issuance abates and presents an even more favorable landscape for larger deal clearance levels.
Floating-rate and agency CMBS
Floating-rate spreads were unchanged and deferred to fixed-rated issuance and focus. The tightening from the previous deal pricing has provided enough price discovery to last until the end of the month when possibly two deals will price. Those two deals were thought to be the large loan via Wachovia Securities and a hotel floater from Banc of America Securities, Bear Stearns and Merrill Lynch.
In terms of agency CMBS, spreads were overall tighter as just one new deal hit the structured GNPL market with the pricing of GNR 2007-4: a $353 million deal via RBS Greenwich Capital. The longer class priced one basis point inside of prevailing levels and was in the same direction as fixed-rate conduit spreads. The deal was two times oversubscribed and had several preplaced classes. The one basis point tightening kept spreads at five basis points over pick to conduits.
In the DUS space, levels were unchanged on the spread to swaps yet the slight underperformance of swaps relative to Treasurys basically accounted for the additional pick debentures in the long end, while intermediate swaps snagged a basis point from the DUS/debenture correlation. DUS has been quiet and stable overall and usually benefits when Fannie Mae runs into accounting problems - note that the GSE is holding a conference call next week to discuss the delay of earnings for 2005 and 2006. The spreads have not gapped or moved as a result, and this is perceived as a positive announcement overall. In the past, when accounting irregularities were uncovered, DUS benefited from the widening on agency paper on the strength of its collateralized cash flows, which also support the commercial bonds in addition to the implied guarantee of Fannie Mae paper.
The credit default protection market was tighter overall last week as the positive tones in the market, both outright and in comparison to other structured markets, was instrumental in grinding spreads in as much as four basis points in the lower classes of CMBX.2. There has been no sympathetic fallout from the subprime drama that has adversely affected ABS credit protection markets. Conversely, CMBS has routinely enjoyed solid structural upgrade/downgrade ratios from the various rating agencies and weaker markets have rebounded in the CRE space in recent years.
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