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February CMBS/CMBX Trading in Review

For those who see the glass as half full, we are happy to offer up this faint praise for February: at least it wasn’t January. As everyone painfully recalls, January saw its worst month in years with US stocks down more than 5%, oil prices collapsing, and, for CMBS, noticeable spread widening and a consistently pessimistic tone.

For the broader markets, February brought some modest relief with stocks eking out a small monthly gain and oil prices stabilizing (albeit at a low dollar price). For CMBS and CMBX, the month ended with the markets starting to show signs of stabilization, but to get to that point, investors had to endure some stomach-churning drops along the way. Over the last week of the month, there were some successful deal pricings and the heavily punished BBB- section of the market for both CMBS cash and CMBX started to rebound somewhat.

CMBS 3.0

For CMBS 3.0, in terms of new pricing levels, the month was mixed. At the top of the stack, including a few deals that priced in very early February, five CMBS 3.0 conduit deals saw the 10-year AAA price at an average spread of S+156 with a range of S+151 to S+162. (That was up from S+136 to S+140 in December). For the rest of February, AAA spreads bled wider with the remaining four deals seeing the last cashflow AAA print at S+165 or S+166.

The news was somewhat better down the credit stack where BBB- saw some firming up very late in the month. In late January/early February, new issue BBB- (either single tranche or blended spreads) were clearing in the S+725 to S+750. By the end of February, there were two deals that saw the BBB- (sole or blended) price below S+700. To be sure, it wasn’t an easy trip from early February to Leap Day: spreads gapped out violently around mid-month for BBB and BB paper, making the market very skittish. (For the sake of comparison, BBB- bonds in December were in the low/mid S+500s.)

If we are going to use “violent’ to describe the cash market in mid-February, we will have to come up with something stronger to describe the CMBX market that never fully recovered from the mid-month collapse. (How about savage or barbaric?) For a couple of sessions, CMBX saw its largest widening since the re-emergence of CMBS. A case in point was February 8th, when CMBX 6/7/8/9 AAA spreads were wider by 8-10 basis points and CMBX 6/7/8/9 BBB- spreads were out 50 to 60 basis points.

Over the course of the month, CMBX 6/7/8/9 AAA were wider by two to eight basis points, with the CMBX 6 AAA spread moving from 102 to 104 over the last month. CMBX 6/7/8/9 BBB- were wider by 49 to 88 basis points with the CMBX 8 being the hardest hit. The CMBX 6 BBB- spread moved out from 462 at the end of January to 526 at the end of February. As noted, those numbers came after some (at points significant) month-end tightening. For comparison purposes, the CMBX 6 AAA spread on February 11th was 123 and the CMBX 6 BBB- spread was 597. (Yes, there was blood in the water.)

The CMBX 6/7/8/9 BB’s were hit even harder, with spreads wider by more than 100 basis points across the board month-over-month and close to 200 basis points at the worst moments in February.

Legacy Paper

Among legacy bonds, spreads held up fairly well for 2006 and 2007 super seniors with there being (amazingly) some reports of modest spread tightening in some precincts. (The tightening really only applied to the best credits with the most ironclad credit protection. Anything with a dent or a story would have seen some widening.)

Below the super seniors was a different story, with spreads out anywhere from dozens of basis points to hundreds of basis points depending upon credit quality.

 Compliments of Trepp, LLC – A member of the EACCNY