A new issue CMBS conduit transaction priced on Thursday, August 4 at the tightest spreads since summer 2015. The issuers, Wells Fargo, Bank of America and Morgan Stanley, priced the long-term super-senior bonds from the $871-million offering at 94 basis points (bp) over swaps. This was significantly lower than the 108 bp level achieved in the prior offering that priced a week earlier. The price tightening continues a trend of declining CMBS spreads that began at the beginning of May after spreads on long-term super-senior bonds peaked at 173 bp over swaps.
The transaction was the first deal designed to comply with risk retention rules. As of December 24, 2016, CMBS issuers — or B-piece buyers in their stead — are required to retain 5% of transactions for at least five years. CMBS issuers can retain a “vertical strip” encompassing 5% of every tranche, a “horizontal” 5% strip at the bottom of the capital stack, or an “L-shape” strip that combines the first two options. The rules are part of the Dodd-Frank reforms passed by Congress after the financial markets collapsed in 2007-2008. Wells Fargo, Bank of America and Morgan Stanley elected to go the “vertical strip” route for this transaction.
Dealers noted the transaction contained mostly top-tier, low-leverage loans, and therefore, the pricing may not be indicative of market spreads for more typical CMBS deals, which contain a mix of high quality and lesser quality loans with a typical average loan-to-value of 65.0% versus the 55.6% reported in the Wells transaction. The next few deals scheduled to come to market continue the theme of lower leverage/higher quality loans in the issues, so it may be a few weeks until the market gets pricing indications for a more typical higher leverage CMBS transaction.