Lehman, UBS lower yield spreads on $1 billion CMBS

By Al Yoon

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N and UBS Securities (UBSN.VX) on Thursday lowered some yields on $1 billion of commercial mortgage-backed securities in a rare sign of market stability.

The deal may mark the first CMBS of 2008 to price at yields lower than those first pitched, investors said. Previous issues have been sweetened with additional yield to draw investors shaken by the credit crunch and concerned that commercial real estate would falter in a U.S. recession.

Lehman and UBS lowered yields on the "AAA" rated portions by 15 basis points to 25 basis points without losing orders, investors familiar with the deal said.

Very few CMBS have been priced in 2008 due to poor investor demand as soaring yields have boosted the risk underwriters take when pricing an issue. The deals have been smaller than many of 2007 as investors have become less accepting of underlying loans made under riskier terms.

Signs that sentiment has begun to improve have been seen in the secondary market for CMBS.

Yield premiums on outstanding 10-year "AAA" bonds have dropped by 1 percentage point in the past month to 1.95 percentage points over interest-rate swaps, according to JPMorgan Chase & Co.

In February, CMBS suffered their worst month ever in terms of returns, lagging even the asset class that includes subprime asset-backed securities as investors increased bets against the debt of office buildings, retail stores, hotels and apartment complexes.

"Right now, the opportunity is in the debt" rather than the properties, Thomas Sherlock, a senior managing director at Buchanan Street Partners, said at a Trust Company of the West panel discussion in New York. "There is more relative value."

The safest, "AAA"-rated 10-year part of the LBUBS 08-C1 issue was priced on Thursday to yield 1.9 percentage points over benchmark interest-rate swaps, down from Tuesday's pre-pricing level of 2.1 percentage points. Based on the 10-year swap rate, the bonds yield about 6.34 percent.

Last Friday, Citigroup Inc (C.N) and Goldman Sachs Group Inc (GS.N) boosted yield premiums of "AAA" rated 10-year bonds from their $1.85 billion CMBS issue by 0.3 percentage point, to 2.25 percentage point.

Loans on economically sensitive retail and office space properties made up two-thirds of Thursday's issue, about the same percentage as in last Friday's CMBS sale.

"The market, generally, in CMBS is better, and underwriting standards are much better than a year ago," said Jason Brady, a portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.

Buchanan's Sherlock said he does not expect to see a "giant spike" of delinquencies in CMBS.

(Additional reporting by Jennifer Ablan; Editing by Dan Grebler)