In the last week of June alone, $4.6bn of CMBS deals were priced across four conduit deals and a single borrower-single asset transaction. The monthly private label total reached $11.5bn, the highest since February 2015, according to Kroll Bond Rating Agency.
However, a consistent problem dogging the market is the continued absence of buyers at the triple-A level. S&P Global Ratings estimates that a declining buyer base has driven the average conduit CMBS deal size from $1.068b in the first quarter to $839m.
Spreads in conduit CMBS have also widened as a result. While spreads on 10 year triple-A senior bonds kicked off the year at post-crisis tight spreads of 66bp over swaps, the same bonds sold in UBSCM 2018-C11 were priced at 98bp over swaps on June 28, the highest level seen this year. However, BBB- pricing has tightened in conduit deals over the year, as B-piece buyers clamour for the higher yielding subordinate notes.
One CMBS arranger told GlobalCapital that “as the CMBS sector has gotten smaller in relation to the rest of the overall bond market, the number of dedicated buyers has dropped. The supply of Freddie Mac paper is also more active and consistent. This has caused issues, as we saw last week when four deals priced in one week and caused underwriters to raise spreads to move the paper.”
“The CMBS crowd is fairly sticky, but it’s a smaller group now than it used to be,” he said.
A CMBS investor highlighted that market participants could have pushed up spreads on the back of interest rate increases in the US and trade war volatility. She also noted that a number of the proprietary desks which propped up the CMBS market before the 2008 crisis had scaled back due to the Volcker rule, leaving the market in the hands of a smaller group of market makers.
“When it comes to the June spreads, it’s all about finding relative value. Investors are evaluating whether there is value in real estate debt versus competing products, including but not limited to CLOs.”
Meanwhile, underlying conduit CMBS credit continues to exhibit late-cycle behaviour. S&P reported that a higher number of loan agreements that do not prohibit the borrower from entering into Property Assessed Clean Energy (PACE) financing, which is technically senior to mortgage debt. However, the proportion of interest-only loans declined somewhat, which is credit positive for the asset class.
Credit standards did not decline across the board but instead expanded at the tail ends of the distribution curves. In the deals reviewed by S&P, LTVs were in the range of 78.7%-94.2%.
“This helps explain why the average of our required credit enhancement levels increased by such a wide margin in the second quarter for what seems like moderate deterioration in the overall metrics,” said S&P analyst Natalka Chevance.
After taking a pause for the July 4 weekend, the CMBS market is lining up several deals to be priced later this week. These include a multifamily conduit deal from Freddie Mac and a single borrower office deal from Deutsche Bank. Natixis and JP Morgan also filed regulatory documents with the SEC for upcoming single asset-single borrower deals.
