Spreads in the intermediate to longer triple-A sectors continued to gap out as a significant amount of CMBS has been coming to market this month. For instance, at the start of last week, two more fixed rate deals priced - adding another $5.5 billion to the system - on top of one large floater deal, JPMC FL2, that also came to market last week.
Investor appetite is growing weary as the intermediate triple-A sector has gapped out considerably and the 10-year super senior class is now within a few basis points of the wides of the year. Most of the spreads widening is supply-related as the other remaining sectors, such as agency CMBS, were unchanged on spread in the absence of issuance and or focus.
Private label CMBS
Two fixed rate deals priced this week, including the $2.5 billion BACM 2006-6 that led off last Monday. Spreads on the deal priced to guidance levels with 10-year triple-A super seniors coming at 25 basis points over swaps and five-years creeping out to 21 basis points over swaps, the widest five-year print since GMAC and LBUBS deals priced at 22 basis points over swaps in the first months of 2006.
The triple-Bs were one of the few classes to tighten during this supply onslaught as they have now placed inside 80 basis points over swaps -well tight of the early first quarter levels at 125 basis points over. Meanwhile, the super seniors are at their widest since the third quarter when the five-year/10-year triple-A swap was pick 10 basis points, as opposed to the four basis points pick currently. The LB-UBS C7 deal was launched on Monday and priced on Tuesday, with 10-years going out at 25 basis points over swaps and five-years, again, staying wide at 22 basis points over.
These levels are viewed as prime dip buying opportunities and may start to attract enough interest to start the pipeline "snap" back in. This two deal total for the week, as mentioned, injected another $5.5 billion of new paper into customer shelves and is factored against the roughly $2 billion in bid list supply swapped out from the previous week (mostly in triple-As) that headed the other direction into dealer inventories.
The previous week, to help clear its deal, JPMC CIBC17 offered triple-A SS bonds a half basis point wider at the low, low price of 25.5 basis points over swaps. The half basis point feature was a new wrinkle on deal clearing tactics and spoke to the current clogged pipeline.
Floating rate CMBS
Floating rate issuance saw the pricing of the year's largest deal late recently: Credit Suisse's CSMC 2006-TFL2 at over $3.4 billion. The levels priced wider than previous deals as the deal size and collateral mix - healthcare, hotels and condo conversions - served to push the A2s, most notably, outside of initial talk, landing at L+17. The JPMC FL2 deal priced Tuesday with levels on the $1.5 billion offering not seen as gapping much from CMSC's larger deal and the A2s pricing at L+13. The triple-B classes have remained well bid on continued CDO demand for that sector.
In CMBS agencies, there has been little to no flow as once again, new issuance in the private label segment of CMBS has taken all the attention away from this much smaller percentage of the pie. GNMA project loans and DUS were relegated to spectator status and spreads remained of the unchanged variety. With the widening in 10-year triple-As, project loans spread pickup to triple-A super senior 10-year paper has shrunk again, this time to three basis points, which is within sight of the tights of the year.
The credit default protection market - CMBX.1 and CMBX.2 - saw some tightening in the middle classes and some stabilization in the double-Bs, as the fervor over double-B protection calmed down a bit from the initial weeks.
The widening speculated in double-Bs as a result of the MSC06-IQ11 Le Nature loan liquidation workout has not materialized. The situation has not played out yet and market spreads are unchanged with respect to the "Nature" in credit protection space. According to Lehman Brothers research, a 35% loss severity on the pool in question (Le Nature) would reduce the double-B credit support to less than half its current levels and "additional losses" would completely wipe out that double-B tranche. At first, the double-B class of CMBX.2 widened out 10 basis points, but has since stabilized in the past six business days. The BBB'/BBB-' classes that would be affected in direct response have since tightened in CMBX.2 as the continued sponsorship in the lower IG brackets is proving to be a strong countervailing force.
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