CMBS spreads tightened further this week as two CMBS issues priced at levels tighter than a CMBS offering led by Wells Fargo that priced on March 18. The benchmark AAA-rated super senior CMBS bonds from the most recent $818-million offering from Deutsche Bank and JPMorgan priced on Thursday at 129 basis points (bp) over swaps, 18 bp tighter than the Wells Fargo deal and an astounding 44 bp tighter than the peak level of 173 bp reached on March 3. Demand for the Deutsche Bank/JP Morgan CMBS issue was strong as dealers were able to price the super senior CMBS bonds inside the 132 bp price guidance. The second issue, a $771-million offering led by Citigroup and Societe Generale, also priced well; the benchmark AAA-rated super senior CMBS bonds fetched 132 bp over swaps, beating price guidance of 135 bp.
The rally has carried over into other classes of CMBS as well. The junior AAA-rated CMBS from the Deutsche Bank/JP Morgan deal priced at S+155, down 65 bp from the March 3rd peak. Class B CMBS, rated AA/AA-, priced at S+220, down 80 bp from the peak. The lowest investment grade class, rated BBB/BBB-, priced at S+600, down a whopping 225 bp from the March 3rd peak.
Market participants chalked up the better pricing to a number of factors, foremost a lack of new offerings to satisfy investor demand for CMBS. Volatility surrounding the run-up of spreads since the beginning of the year has stifled new loan originations, reducing inventory to be securitized.
“The rapid decline in spreads has resulted in a reduction in loan spreads to borrowers of approximately 50 bp, to a range of 300-325 from 350-375 prevalent just a few weeks ago,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “With 10-year Swap and Treasury rates well below 2%, all-in interest rates are around 5%, a level at which loan activity should pick up.”