Primary supply continued to build last week, contributing to the growing discord between primary and secondary market trading, with market trades continuing to be affected by the corporate spread widening. Pricing on the primary side continues to offer investors some relief, with several of last week's deals pricing at the wide end of talk.
Industry sources said the general spread softening seen in the primary should continue for the next few months but did not expect to see any major spread widening in the short term. Trades in the secondary offered investors some arbitrage at the start of last week, particularly in CMBS where the recent deluge of primary issuance continues to add pressure on trades.
Market analysts reported that trades for sterling-denominated paper weakened in line with the widening trend seen since April, thus adding pressure to spreads for U.K. CMBS. "We believe that the discrepancy between the primary and secondary market will remain until July, and suggest that investors take advantage of such arbitrage," noted Merrill Lynch analysts. "This timing is related to the activities in the primary market, which tends to see an avalanche of deals by the end of the first half of the year."
Last week, German real estate lender Eurohypo priced Opera Finance (CSC 3) plc., its GBP710 million ($1.35 billion) CMBS transaction backed by two U.K. shopping centers. The Class A notes priced at 23 basis points over Libor - roughly five to six basis points wider than CMBS levels seen earlier this year. The double-A, single-A and triple-B notes priced at 30, 45 and 70 basis points respectively, over Euribor. The deal follows two shopping center/retail park transactions from the Opera series, both of which priced last month. "Compared to Opera Finance (Fosse Park) from April 14, they were five and four basis points wider at triple- and double-A levels, respectively (for a two-to-three year longer weighted average life), and six and nine basis points compared to Opera Finance (Scottish Retail), reflecting concentrated supply in CMBS, in particular shopping centers, as well as growing uncertainty in credit markets and general spread widening across all credit products," reported Dresdner Kleinwort Wasserstein analysts.
The German issuer also set guidance for its 1 billion ($1.29 billion) Opera Finance, backed by 318 Dutch commercial properties. The triple-A rated notes are talked in the 20 basis point area over Euribor, and the three subordinated tranches are being talked at 30 basis points over for the double-A rated piece, 45 to 48 basis points for the single-A tranche and in the low-to-mid 80 basis point area for the triple-B tranche.
New issuance pricing for Societe General's White Tower 2005-1 CMBS was set in the 20 basis point area over Euribor for the triple-A rated piece, in the 29 basis point area over for the double-A rated piece, in the 46 basis point area over for the single-A rated piece and in the 90 basis point area over for the triple-B notes. "Further issuance in the pipeline from Opera Finance, the Canary Wharf II refinancing, and ENSeC Home I should test demand at these levels," reported Merrill Lynch analysts.
Spreads in RMBS were trading softer last week with triple-A five-year euro floater pricing at 11 basis points over Euribor, while the sterling pieces traded at 12 basis points over Libor and the mezzanine and junior RMBS tranches continue to demonstrate resiliency on the primary level, said market analysts.
HBOs widened initial price guidance on the senior notes of its 1.5 billion Dutch RMBS deal, named Candide Financing 2005. Talk for the 6.4-year A class notes was revised to 14 basis points over Euribor from initial levels set in the 12 basis point area over. NIB Capital last week priced the triple-A piece of its 1.5 billion Dutch MBS XII, which offered similar risk exposure but at a shorter average life, at 12 basis points over Euribor. Candide Financing is seen pricing this week.
"The disproportionate effect that the volume of issuance is having on [triple-A rated] paper, is clearly demonstrated in the DUTCH XII pricing," commented analysts at ABN AMRO. "It also highlights the lack of investor concern over credit quality. Here the triple-A 4.9 year class priced at 12 basis points [over Euribor] whereas the seven-year double-A rated class priced at 14 basis points. And the signs are that mezzanine paper remains unaffected in the primary market despite it being harder to generate interest in secondary paper at wider levels."
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