A volatile swap market added some complications to an otherwise well received $1.37 billion commercial mortgage-backed securities inaugural transaction from Warburg Dillon Read last week, causing the bank and underwriters Lehman Brothers to carefully reconsider who they wanted to market the deal to: insurance companies or money managers?
The transaction - dubbed a "benchmark" deal for this year by several market players - is slated to be the largest conduit for 2000. The deal is set to price this Tuesday or Wednesday. After being taken out on a roadshow to more than 70 accounts last week, however, a choppy CMBS market and volatile swap spreads caused a distinct breakdown between Libor and the fixed-rate market.
Because of this - as well as higher interest rates and widening spreads - insurance companies who usually write whole loans may turn to triple-A 10-year CMBS as an alternative, sources say, creating a dilemma for Warburg as they try to decide how to market the deal.
"Swaps are a little wacky here, they're out around 120 now," said Brian Harris, executive director of principal finance and credit arbitrage at Warburg. "Recently deals have been trading off Libor. If you call the Chase deal a barometer...it was at Libor plus 43, so that means our triple-As are trading relative to Treasurys, at 164 over.
"Insurance companies, who really don't care about Libor, are starting to step in. They are having trouble writing whole loans, due to market conditions. So I think a lot of insurance companies may participate in our deal, whereas in the past you've had a lot of money managers," Harris added.
According to Harris, if insurance companies are writing whole loans at 175 over Treasurys, then they may be attracted to triple-A 10-year CMBS at 160 over. "It's a very compelling trade," Harris said, "so the question between us and Lehman is, do we just talk to insurance companies or should we continue following this Libor trend?"
Other sources agreed that the question was not whether the deal would sell - market players were eagerly awaiting it - but at what level? "If [insurance companies] could buy something cheaper, they will," said one CMBS source.
"Will this be heavily participated in by insurance companies, money managers or both?" another source asked.
"We are discussing whether the price talk should be centered around Treasurys or Libor," Harris said. "We're leaning toward Treasurys because, on a relative-value basis, the insurance companies are buyers here."
Price talk was not available by press time.
Deal is Doing Well
Despite the effect of swap spreads on the marketing of the deal - the first deal of 2000 for CMBS underwriting titans Lehman Brothers (see chart below) - market sources are very curious to see how the transaction prices.
"All of us who also have product out there, either bonds or loans, are also hoping this goes very well, because this deal is going to set the tone in the market for awhile," said a CMBS trader. "All eyes are looking at it, and Warburg wants to make a big splash with their first deal."
"This deal already has a tremendous number of clients, and Warburg put a lot of bells and whistles on the deal to get it sold," added Michael Hoeh, head MBS portfolio manager at Dreyfus Corp. "They've made significant efforts to make sure it goes smoothly, and they already placed their subordinate bonds, which is the hardest part."
The deal has a high component of retail "which is readily explained with the A/B note structure," Warburg's Harris said. "Fifty percent of the deal is retail, and 30% of the 50% is in a triple-A and double-A note."
Because the deal is slated to be the largest deal of the year, even though it is early March, some market participants feel that smaller players may be squeezed out.
"What a lot of investors like about large deals like this is the liquidity," Harris said. "Our triple-A 10-year is bigger than most conduit deals."