10.14.13: Spreads and Rates Stable After Morgan Stanley Prices CMBS Issue

On October 10, Morgan Stanley and Bank of America (BoA) priced a $1.3-billion CMBS issue that allowed CMBS loan originators to breathe a sigh of relief as the transaction’s spreads were more in line with those of three multi-borrower CMBS offerings that priced last month compared with those of a deal that Cantor Fitzgerald and Deutsche Bank priced the prior week. The result supported the view that the unexpectedly wide spreads on the Cantor-Deutsche issue weren’t reflective of the broader market.

In fact, some subordinate investment-grade classes in the Morgan Stanley-BoA transaction even priced 10-25 basis points (bp) tighter than comparable bonds in the three September deals. And the spreads were as much as 45 bp tighter than on comparable classes in the Cantor-Deutsche deal.

“We looked at buying some of the Class AM and Class B CMBS from the Cantor-Deutsche deal, but we were surprised by the aggressive underwriting of the top two loans, representing 20% of the issue, both of which were underwritten to the bare minimum Net Cash Flow (NCF) DSCR of 1.25x,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Typically, the top loans are underwritten in the 1.50-1.75x NCF DSCR range, providing assurance that the top loans have plenty of cash flow cushion to absorb any temporary cash flow declines, but not in this case. In addition, the third-largest loan, representing 7% of the issue, is secured by a hotel in Mexico, and that was enough for us to easily pass on the deal,” said Sneden.

“In contrast, in the Morgan Stanley-BoA CMBS issue, the top five loans were underwritten with an average NCF DSCR of more than 1.50x, more typical of recent CMBS transactions,” said Jim Brett, head of CMBS analytics at ValueXpress.

As a result of the better Morgan Stanley-BoA execution, loan spreads to borrowers remained stable in the Swaps plus 250-290 range for a 10-year loan depending on asset type and leverage. With the 10-year Swap in the 280 bp area, interest rates to borrowers remain in the 5.25%-5.75% range.

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This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , . Bookmark the permalink.

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