CMBS originators are cautious as ever due to widening spreads. After spending much of the beginning of the year near 80 basis points over swaps, 10-year AAAs have been pricing in the 100-107 bps range.
This has yet to curtail issuance, even as CLOs become more compelling: year-to-date CMBS issuance stands around $60bn, more than 10% higher than the same period last year, according to data from Trepp.
But slim profit margins combined with volatility are causing originators to be “more on top of the market than ever,” said Mike Schulte, who heads up pricing and distribution at Silverpeak Real Estate Finance. “It’s made us more mindful of making sure that when we quote loans we know exactly where the market is.”
The weighted average across all July deals for AAAs was 104 bps over swaps, according to a Morgan Stanley report issued today. BBB-s priced in the 375-440 bps range, with a weighted average of 400 bps.
To hedge risk, firms like Silverpeak must be certain there is enough profit in loans to buffer spread movement and regularly contribute to CMBS transactions, all while avoiding adverse selection of loans (such as Class C assets) and being mindful not to give too much away on structure, Schulte said.
“If you aren’t hedged, the spread widening hurts,” Schulte said. “We try to hedge appropriately. We look at spreads in the overall capital structure and come up with a break even rate and hedge with various instruments to reduce volatility, although it’s not perfect.”
Wider spreads have been blamed on everything from a lack of liquidity and heavy supply, to macro fears stemming from Greece, credit quality concerns and fears of interest rate hikes.
In late June, a $914.4m WFCM 2015-NXS2 transaction backed by mortgages originated by Natixis, Wells Fargo and Silverpeak marked the first time that AAA spreads reached 100 bp since late 2013.
The day after WFCM 2015-NXS2 priced, $1.5bn COMM 2015-PC1 offering by Jefferies LoanCore, Deutsche Bank, UBS, Natixis and BNY Mellon priced at 107 bps over swaps. Two more recent conduits cleared at 105 bps over swaps.
However, spreads have stabilized at slightly tighter levels; the last deal to price for instance, WFCM 2015-C30, came in at 102 bps over swaps in the AAA tranche and 385 bps in the BBB-, according to the Morgan Stanley report.
CMBS originators also don’t anticipate any slowdown in issuance unless spreads widen more drastically across the capital structure.
“The thin profits and volatility have made us more aware, but we are still seeing a lot of product,” Schulte said. “But, for us, if spreads grind out and it’s not a whipsaw we can continue to conduct our business, as we try to make thoughtful decisions in a client-oriented business. If there is a whipsaw then you take another look.”