US CMBS spreads tighten, but significant hurdles remain

The CMBS industry is watching intently as spreads finally tighten, but rating agencies aren’t yet convinced that any sustained improvement lies ahead.

Deutsche Bank and JP Morgan’s $818 million DBJPM Mortgage Trust 2016-C1 conduit offering has priced tight to guidance and tighter than the previous new issue, continuing a trend that began in mid-March, S&P noted in a memo sent this morning.

The AAA senior class priced at swaps plus 129 basis points (bps), 3 bps tight to a pricing earlier this week and to initial guidance, and 44 bps tight to the wide level of swaps plus 173 basis points on an early March offering. Class D sold at S+600 bps, flat to the previous deal but 225 bps tighter than the early March deal.

But a number of hurdles — including pending risk-retention rules and global volatility that caused a prolonged widening of spreads that began over the summer — will continue to weigh on the asset class. In addition, supply/demand issues and FED statements regarding interest rates could be behind the recent tightening, Kroll Bond Rating Agency noted.

“While we are hopeful that the recent tightening will continue, it isn’t clear how much of it is attributable to technicals versus fundamentals,” the agency wrote in an emailed statement.

“The improved pricing may have resulted from deal scarcity, as well as expectations of low issuance for the remainder of the year that spurred buying interest. The tighter spread levels may also have been influenced by the Federal Reserve Board’s recent comments, which implied that the market is less likely to see multiple rate hikes this year.”

Following months of widening spreads and recent dips in issuance, experts slashed their yearly CMBS issuance predictions for 2016: in February Morgan Stanley lowered its issuance estimate by 30 percent to $70 billion, and Kroll Bond Rating Agency said last month that it expects as little as $60 billion on the year.

Tightening spreads are a positive sign, but issuance will need a serious boost to catch up with last year’s figures as the industry continues to fight an uphill battle. Year-to-date private label issuance is now $17bn, including over $11bn in conduit volume, according to S&P, which when annualized falls well short of last year’s $100 billion-plus year.

Morningstar’s Steve Jellinek, vice president of CMBS Analytical Services, noted earlier this week that CMBS new issuance is unlikely to exceed the $101.01 billion in 2015, which was up 7.4 percent from 2014.

“The widening of CMBS spreads has introduced tremendous pricing uncertainty to the loan origination process and caused CMBS lenders to throttle down origination of loans for securitization,” Jellinek wrote in a report.

Many market participants expect CMBS spreads to widen once risk-retention rules take effect in December, require issuers and designated non-investment-grade buyers retain a piece of every deal equal to 5 percent of its market value, he added.