June and 2014 Year to Date CMBS Trading in Review

The CMBS market saw an impressive finish to the first half of 2014 with spreads tightening sharply across the board in June. Those gains came after a disappointing May in which performance was largely flat.

In 2012 and 2013, the spring and early summer turned out to be hazardous times for CMBS investors with meaningful spread widening during those stretches. There was no such drama this year as CMBS investors saw big gains over the last 30 days.

Legacy Paper

Legacy super seniors were noticeably tighter for all vintages from 2005 to 2007. Spreads on 2004 last cash flow senior bonds ended three basis points wider, as investors continue to keep a keen eye on prepayment risk associated with specific bonds but that vintage was the exception. Spreads on 2005 last cash flow super seniors were tighter by nine basis points on average. For the 2006 and 2007 vintages, last cash flow super seniors saw double digit spread gains. The benchmark GSMS 2007-GG10 A4 bond ended the month at 84 basis points over swaps–two basis points tighter than at the end of May.

Most of the spreads gains came from “dented” names, those with relatively small credit enhancement or those still carrying large percentages of delinquent loans. Those bonds saw the biggest pick ups in June.

Legacy AMs saw nice gains in June as well. AMs were four, nine, and fifteen basis points tighter on average for 2005, 2006, and 2007 vintages respectively. AJs bested the legacy super seniors and AMs for all three vintages. The 2005 AJs tightened by 16 basis points while 2006 and 2007 AJs both improved by 22 basis points on average.

CMBS 2.0/3.0

The CMBS 3.0 market saw a barrage of new issue conduit deals price around mid-month but the calendar for the last two weeks was filled almost exclusively by single-asset deals. In terms of spread levels, CMBS 3.0 rebounded sharply in June after a lackluster May.

New issue AAA last cash flow bonds improved markedly over the last 30 days. The 10-year new issue market was trading at 84 basis points over swaps at the end of May. By the end of June, that market was better by six to eight basis points as new issue AAAs were generally being quoted in the mid to upper 70s over swaps. New issue double As ended the month at around 130 basis points over swaps, five basis points tighter than where they stood at the end of May. Single A new issue paper closed June at about 175, another 10-basis-point tightening over the month-end May level. BBBs ended the month at 315 basis points over swaps, which was 20 basis points better than the average of the last BBBs to price in May.

Year to Date

Legacy: The first half of 2014 saw big gains for the 2006 and 2007 vintage super senior bonds. On average, these segments saw tightening of 28 and 33 basis points. Some of these gains were driven by significant resolutions of distressed loans. Earlier in the year, there was a large overhang of troubled assets. The uncertainty of the early return of principal kept spreads on super seniors higher earlier in the year. Now that many of these troubled loans have been resolved, and the uncertainty removed, many of these bonds are trading significantly tighter. As an example, the GSMS 2007-GG10 A4 bond was trading at a spread above 150 over swaps early in the year. At that time, the deal had a double digit delinquency rate. By June, the delinquency level for that deal was down to 1% thanks to large resolutions and the bond ended the first half trading at swaps plus 84.

Even more impressive were the gains for the legacy AM and AJ classes. Legacy AMs from 2005, 2006, and 2007 were tighter by 16, 37, and 74 basis points respectively over the first half of 2014. Legacy AJs did even better, tightening by 58, 170, and 147 basis points on average over the last six months.

New Issue: The first half of 2014 witnessed meaningful spread tightening across the board for the CMBS 3.0 market. With investors searching everywhere for excess yield and lenders competing hard for loan assignments, the conditions were ripe for a CMBS rally.

The last issue to price in 2013 saw the 10 year AAA clear at 93 basis points over swaps. By the end of June 2014, the last cash flow AAAs were 15 basis points or more tighter than that level. The last issue to price in 2013 came on December 19th. There was meaningful tightening between that time and the first week of January – so how much of the rally should be attributed to 2014 can be debated.

The last issue to price in 2013 saw the AA-, the A-, and the BBB- clear at 165, 225, and 390 over swaps respectively. Those spread levels also fell over the last week of 2013, but for the sake of comparison, the last conduit to price in June 2014 saw levels of 140, 175, and 315 over swaps.

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