CMBS spreads were wider as guidance was released on the two deals that were in the market last week and that were slated to price by month end. The Lehman Brothers-UBS deal launched and priced last Tuesday.
Triple-B and triple-B-minus classes were hardest hit by Moody's Investors Service's recent announcement that it was increasing credit enhancement levels for CMBS deals. Supply was not an overriding factor as credit support and deal composition took center stage. The subprime fallout - particularly via the ABX space - has actually lent a behind-the-scenes hand here, waking up rating agencies to act and present themselves as being more vigorous and proactive.
The secondary market was heavy on bid-list supply, and offerings were wider via dealer sheets as the week ending April 20 closed out. The past two weeks saw over $4 billion in mostly triple-A senior and junior tranches, which is twice the normal amount. Offerings were wider by three basis points in the longer triple-As and two to three basis points off intermediate locked-out classes.
Agency markets held firm as private-label securities leaked out and the government guarantee finally gave Ginnie Mae Project Loans (GNPLs) an advantage overall. As spreads on CMBS conduits gapped out, GNPLs stayed unchanged and even tightened in shorter-dated securities.
In the CMBX space, protection spreads were wider in the lower credits particularly, with CMBX.2 widening out at a more pronounced rate than CMBX.1. The recent Moody's report distancing itself from credit enhancement levels on recent deals had much to do with this price action.
Last week, guidance surfaced on the two deals that were in the market from the previous week, with the LBUBS 2007-C2 pricing. LBUBS levels were one to two basis points wide of initial guidance on triple-As (princing at 29 basis points over swaps versus guidance of 28 basis points over swaps), with lower triple-Bs 15 to 20 basis points wide. Triple-Bs were priced at 170 basis points over swaps where guidance was 155 basis points over swaps, and triple-B-minus spreads priced at 225 basis points over swaps after initial direction was at 205 basis points over swaps.
As of Tuesday, levels on the $3.3 billion CSMC 2007-C2 and the $4.23 billion GECMC 2007-C1 showed recent levels surging over 200 basis points over swaps on triple-B-minus classes, with triple-Bs at the midcentury point (150 basis points over). Super senior triple-As were in the high 20 basis points over (in the 28 to 31 basis point range), a level that matches the widest spread levels of the past 13 months. Spreads haven't been at, or over, 30 basis points over swaps since the latter part of Q405. Given the current spread environment, the gap between marketing and actual pricing has been steadily growing.
The pipeline for April totaled about $15.13 billion on five deals ($3.206 billion average). The last deal that was expected to come to market was the $6 billion WBCMT 07-C10 from Wachovia Securities. This deal represents the fourth deal over $6 billion this year. The early days of CMBS when Ethan Penner's ASC Mega Deals barely approached $1 billion seem so long ago.
The floating-rate sector had no real recent activity on either the primary or secondary fronts, and spreads were unchanged as a result. The one deal in the market, the $2.52 billion COMM 2007-FL14 via JPMorgan Securities and Lehman Brothers, did issue guidance levels last Monday. The transaction was expected to launch before month end. Levels are two to eight basis points wider on triple-As to single-As. Triple-Bs gapped out in sympathy with the fixed-rate credit curve.
The credit default protection saw spreads stabilize modestly in the older CMBX.1 market and continue the lower tranche gap out of triple-Bs and double-Bs in the newer CMBX.2 index. The fallout from the Moody's move to basically disavow current ratings in favor of either more seasoned paper or issues yet to come and Fitch Ratings' move to join the fray have crushed lower rated classes.
The newest CMBX index surfaced as CMBX.3 made a market debut last Wednesday. The current index saw triple-Bs widen five to 15 basis points while double-Bs were 40 basis points wider. The next index to roll out, based on even weaker underwriting standards, will likely come out wider based on negative market perception. This is regardless of loan default assumptions for newer deals.
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