While AAA-rated senior investment-grade CMBS spreads remain flat, junior investment-grade CMBS spreads continue to tighten for recent CMBS issues as investors take on additional credit risk in search of more yields. Long-term super-senior CMBS with an initial 9.5- to 10-year life have seen spreads stuck at 72 basis points (bp) since the beginning of 2013 as all five multi-borrower CMBS offerings have priced the long-term super-senior bonds at 72 bp.
Meanwhile, the junior investment-grade classes continue to tighten. The junior investment-grade classes typically consist of AA-minus rated class B, A-minus rated class C and the BBB-minus rated class D. Subordination levels typically range from 6% for the BBB-minus class to 15% for the AA-minus class. The spreads on these classes have tightened on each issue since the beginning of the year, as the classes are generally oversubscribed, allowing dealers to successfully test tighter levels for each new deal. For example, the class B bonds from the Morgan Stanley/Bank of America (BoA) issue on January 9, 2013 priced at 155 bp and compressed to 145 bp for the Goldman Sachs deal on January 24, 2013, then to 135 bp on the Wells Fargo/RBS deal on January 28, 2013. The most recent deal to price, a $1.14-billion multi-borrower offering from Morgan Stanley and BoA, priced the class B bonds at 125 bp on February 5.
“The spread compression has been great for our portfolio of class B CMBS purchased from the last 12 CMBS issues, and it allowed us to take some profits,” noted Michael D. Sneden, Executive Vice President of ValueXpress. “But on the other hand, replacing those bonds with new CMBS at tighter spreads is scary; once the spread tightening stops or reverses, it could spell trouble for the value of the portfolio.”
“Borrowers should benefit from slightly tighter spreads on their loans,” suggested Jim Brett, head of underwriting at ValueXpress. “Most spread reduction results from compression in super-senior CMBS since those bonds comprise the bulk (80% +/-) of a CMBS issue, but there is nothing wrong with a little spread reduction from junior investment-grade bond spread compression.”