More than a month after being scuttled due to comments made to this newsletter by a Warburg Dillon Read official (MBSL 3/27/00, 4/3/00), Lehman Brothers Inc. and UBS Warburg (formerly WDR) relaunched their benchmark $1.37 billion commercial mortgage-backed securities conduit last week to an enthusiastic CMBS crowd, marketing it in force in the hopes of pricing this week.
Attorneys for Lehman and Warburg decided to pull the deal when it was initially launched at the end of March, after Warburg official Brian Harris made comments to MBSL that could have been construed as breaking the "quiet period" enforced by Securities and Exchange Commission laws. In particular, Harris called the deal's triple-A 10-year tranche a "compelling trade" to "writing whole loans" for insurance companies.
The lawyers for the managers insisted on a "cooling-off" period for the deal, which put a significant damper on what would have been the inaugural offering for UBS and the first CMBS deal underwritten by Lehman this year.
Despite this, market observers say that the deal will still make a big splash in the product-hungry CMBS mart, which is ever so eager for new supply.
"This is a very large, benchmark transaction, and they've been through the marketing before, so now it is just a matter of getting the people back who looked at it the first time," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "This is going to garner a fair amount of interest. They went out with the right price talk, and they are putting their best foot forward."
"Most people are looking at this deal as the major source of excitement in the market," added a CMBS trader. "Everyone will own its bonds and trade them, because there are so many of them."
The original marketing levels for the five-year senior tranche seen March 27 are about three basis points wider than where Lehman and Warburg are targeting a print this time around. Lehman Brothers gave no comment as to how the deal was going.
The largest class (the nearly $700 million triple-A 10-year A2 piece) was being seen a dime cheaper than original guidance, and the 10-year subordinate classes were also commanding guidance slightly outside the initial levels seen the first time around.
The price talk for the deal was Libor + 45, which equates to 170 basis points over Treasurys, "a pretty attractive Treasury level," said Robert Calhoun, co-director of research at Tattersall Advisory Group. "It is a fairly clean deal, and Lehman deals always trade pretty well, and people are willing to trade them in pretty liquid markets. They will be very quotable bonds."
Some sources mentioned that the managers lost a bit on funding costs because of the need for a cooling-off period, and other costs were probably incurred by delaying the deal.
Moreover, it is difficult to get $1 billion of triple-A orders, especially considering the enormous number of bid lists that the CMBS market saw last week.
However, the deal seemed to be going fine at the triple-A level, and the current price talk is considered fairly cheap.
"I personally like some of the seasoned late 1998 or early 1999 paper," Calhoun added. "Some of those A2 tranches have sub 90 handles now and trade at mid to high Libor."
The sale's other AAA-rated class, a $47 billion 5.66-year issue, may be sold at a yield of 30 basis points more than similar-maturity swaps, or 126 basis points over Treasurys.
In other CMBS news, some investors were passing on the Starwood Financial deal that launched last week.
"I didn't like the structure of the loans," said one CMBS investor. "They are second liens, or mezzanine financing. It is very difficult to evaluate those from a credit standpoint. Additionally, the pricing was aggressive and the subordination levels were too thin. And that's enough for me."
Overall, however, the CMBS market is being viewed as a relatively safe haven right now for fixed-income investors due to the volatility in the corporate and agency markets.
"It's healthy that the market has had a tremendous amount of liquidity considering what has been going on in the other fixed-income markets," said Dreyfus' Hoeh. "Unfortunately, more securities have gone into dealer inventories lately, but dealer inventories are not heavy to begin with.