September 28, 2012 / 7:16 PM / in 5 years

REFILE-JP Morgan CMBS conduit brings new ratings drama

By Adam Tempkin

Sept 28 (IFR) - JP Morgan this week priced the public portions of a US$1bn CMBS conduit at some of the tightest spreads in five years.

Although a 9.75-year benchmark Triple A piece of JPMCC 2012-C8 widened out three basis points from price guidance, the pricing level on Thursday - swaps plus 88bp - still represents keen investor demand for the paper.

The CMBS market has been heating up ever since the Fed started a third round of quantitative easing earlier this month, saying that it would keep rates low through at least 2015.

The “risk-on” environment promoted by this move has increased interest in CMBS, which has seen more than US$7bn price so far in September - the highest monthly rate since 2007.

A separate conduit from Wells Fargo and RBS the week before priced a similar Triple A tranche even tighter than last week’s JPMCC deal, at swaps plus 85bp.

A 2.69-year piece of the JPMCC C8 deal priced at swaps plus 25bp, while a 4.88-year slice priced at swaps plus 50bp and a 7.36-year priced at swaps plus 75bp.

The conduit was the first that S&P was mandated to rate in more than a year, after in effect being shut out of the market because of a ratings gaffe in July 2011. Three other agencies, Fitch, DBRS, and Kroll, also rated the transaction - a rare four-agency deal.

Investors complained that S&P came up with an overly optimistic 82% expected-case loan-to-value (LTV) for the transaction, while the other three agencies calculated stressed LTVs anywhere from 96 to 100.


Additionally, the Class G of the transaction was split-rated: S&P rated it in the Double B category, while the other agencies considered it a Single B. Several market participants said that the split ratings showing up in recent deals points to the return of ratings shopping.

A Triple B minus rated tranche priced at swaps plus 535bp, compared with plus 500bp for a similar tranche of the Wells Fargo/RBS conduit from the week before.

While demand for Triple A slices has been strong, riskier, lower-rated investment grade tranches have garnered less interest in recent offerings.

A US$405.7m large-loan transaction from Morgan Stanley and Bank of America that priced on Wednesday, titled MSBAM 2012-CKSV, had a split-rated Triple B tranche.

Morningstar assigned a BBB- rating to it, while S&P assigned it a BBB. Kroll, the third rating agency on the deal, would not assign it a rating at all.

Market sources say that the pricing spreads gapped out so much on this tranche that one of the lead underwriters, Bank of America, would not divulge pricing levels to the broader market.

Investors passed on the tranche - known as a rake bond - because they did not believe it was truly an investment grade credit. Rake bonds are subordinate and are typically tied to the performance of a single loan.

A Double A slice also widened out: it was originally supposed to price at a maximum of swaps plus 195bp, but ended up printing at swaps plus 205bp. The Single A was supposed to price at a maximum of swaps plus 235bp, but ended up widening to plus 250bp.

On Thursday, Deutsche Bank and Cantor Fitzgerald announced the US$875.989m COMM 2012-CCRE3 CMBS transaction. Moody’s and Fitch were selected to rate it.

Retail properties, considered among the riskiest in recent transactions, comprise nearly 40% of the deal.

Morgan Stanley and Bank of America teamed up for another transaction, the US$1.123bn conduit titled MBSAM 2012-C6. The offering was announced on Thursday, and is also rated by Moody’s and Fitch.

The transaction is collateralized by 61 loans representing 76 commercial properties.

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