After super-senior AAA-rated CMBS spreads declined to a post-crash low of 71 basis points (bp) in mid-July, spreads surged in the first week of August. On August 6, JP Morgan, Barclays, Starwood and GE Capital priced the super-senior AAA-rated CMBS of their $1.1-billion CMBS offering at 85 bp, a whopping 14 bp increase. The next deal in the market is a $1.2-billion offering by Cantor Commercial Real Estate, Deutsche Bank, Ladder Capital and Nataxis. Price guidance on the super-senior AAA-rated bonds is also 85 bp, but if the weakness continues, Cantor may have to increase spreads further to attract buyers. Spreads were wider on all the other bond classes from the JP Morgan deal, generally by 15-25 bp.
CMBS professionals expressed a variety of opinions for the spread widening. Investors appear to be demanding higher spreads to compensate for the decline in swap rates to attain a satisfactory overall yield from CMBS investments. Traders were also wary of the turmoil in the Middle East and Ukraine. Such events tend to push out credit spreads and increase investments in less risky U.S. Treasuries.
One investment banker summed it up as “The August blues: You have a lot of deals in the queue and all the CMBS buyers are on vacation. With no one to buy the bonds, dealers have to widen spreads to get the deals out the door. Hopefully, the market will correct somewhat in September.”
The news is bad for borrowers. New quotes in August are 15-20 bp wider, and since recent deals under application were signed during a period of heavy competition, some borrowers may be facing re-pricing prior to closing; this is a difficult conversation for borrowers who do not fully comprehend that market forces can negatively impact their interest rates prior to closing.