Two long-dated, sterling CMBS transactions were pulled from the market at the beginning of November, as issuers surveyed the price they would have to pay for their deals to clear, and decided to wait for better times.
Asset backed analysts pointed out that both deals were aimed at particular investors, those U.K. pension funds and insurance companies that buy long-dated, fixed rate sterling deals. "If a couple of them pass, that makes it difficult," said one analyst.
The first deal to be postponed was an innovative CMBS from Peel Holdings, worth GBP610 million ($990 million). It is arranged by Deutsche Bank's structured securitizations team, and backed by future income from the Trafford Centre, a retail and business complex outside Manchester.
According to K.V. Prabhakar, head of ABS syndicate for Deutsche, the deal will be back next year in the expectation that spreads will have returned to reasonable levels.
"Given the size of the deal and the number of deals in the market, it was actually going quite well, but the company was expecting to place GBP610 million and that's a lot of bonds, particularly fixed-rate sterling bonds, especially at this time of the year. So they decided to go into the market next year, when, barring any unforeseen Y2K problems, liquidity should be really good," Prabhakar said.
The other postponed transaction was a long-dated, fixed rate nursing home-backed deal from Bupa, which was being arranged by Merrill Lynch. That too will be back in 2000.
According to a Merrill official, Bupa did not need to access funding and so could afford to wait for market conditions to improve in the new year, when not only would there be no more Y2K concerns, but the deal would no longer be affected by two similar deals that have just priced at relatively wide levels.
According to ABS analysts, spreads have remained stubbornly high since August and have recently widened further as worries about Y2K combine with a recent flood of supply (at least in the Euro-denominated market) to leave investors insisting on being well-paid for buying any deals beyond vanilla transactions with short maturities.
"Investors and issuers are playing a cat and mouse game, but if they are not careful investors will end up with cash that yields very little and issuers without funding," said one ABS research team head.
While relatively exotic deals such as the ones from Peel and Bupa have lacked eager takers, that has not stopped other deals particularly those denominated in Euros from being snapped up.
As Prabhakar points out, Deutsche has successfully placed two deals backed by German assets in the last few weeks. The first was a repeat issue from its own GEAR commercial loan securitization program which totaled E508 million ($529 million) and priced at 23 basis points over Euribor, four basis points wider than the program's initial deal, which was launched last November and had a slightly shorter average life. "That is simply the widening in the market," he said.
The second deal was arranged for Deutsche Hypothekenbank and was the first German CMBS. It was worth E267 million and also had no shortage of takers on the continent and in the U.K., with the senior 3.83 year tranche pricing at 32 basis points over three-month Euribor.
One investor explained why he was taking some convincing to get into the primary market: "It's very simple; we're not desperate to buy at the moment, so if someone wants to show us a deal, we'll take a look, and if they want us to buy they'll have to pay us what we want," he said. "Of course, spreads are pretty wide at the moment at least compared to historical levels so we have been doubling up on deals we already own at pretty cheap levels in the secondary market."