New CMBS BBB- bonds catch bid, but some urge caution

Tue May 6, 2014 6:06pm EDT

NEW YORK, May 6 (IFR) - A strong bid for yield has pushed mezzanine CMBS 3.0 bond spreads to the tightest level in the last 12 months and only a spitting distance away from pre-crisis tights. And this pace of tightening is prompting concern among some analysts.

Fast money and yield-focused accounts helped squeeze new-issue Triple B minus spreads 5bp tighter last week to swaps plus 325bp, the tightest level in the past 12 months, according to a Jefferies report today.

Interest for the bonds however is showing no signs of abating with this week about US$225m in more secondary Triple B minus bonds put out for bid, according to Scott Buchta, strategist at Brean Capital. He noted good levels of trading in both seasoned and new paper, with three large lists driving much of the flow.

The Triple B minus tranches of some 2011 deals were on the bid lists with covers at spreads as low as swaps plus 250bp.

Among those, a US$16.61m slice of the Triple B minus rated E tranche of DBUBS 2011-LC1A covered Monday roughly 10bp tighter than talk of swaps plus 260bp, according to one dealer. Moving even tighter was a US$10m slice of the Triple B minus D tranche of UBSCM 2012-C1, which covered about 22bp inside talk of swaps plus 310bp.

Overall, subordinated CMBS have tightened about 70bp-90bp from the beginning of the year, according to Darrell Wheeler, analyst at Amherst Securities.

While seeing it as a good time to take profits, Wheeler was concerned by the pace of tightening of the bottom pieces of freshly-minted CMBS deals, which lacked performance history.

"The market seems challenged to really distinguish more than 10 or 20 basis points among credits given the strong liquidity," he said. "Yet there are credit differences among collateral that make some of these credits very risky if we incur a recession."

In many new issues, Amherst's Wheeler sees losses reaching 3% to 5%. But for a few deals, losses could reach 8% to 10%, he said, warning that scenario would definitely impact some of these credits.

"So the current market is definitely discounting near-term recession risk," he added. (Reporting by Joy Wiltermuth; Editing by Shankar Ramakrishnan)