CMBS spreads widened to record highs last week when two new conduits priced at levels not seen since 2013.
The 10-year AAAs on COMM 2015-CCRE25 and JPMBB 2015-C31 priced at 116 and 120 bps over swaps, respectively, on Thursday — 10 to 15 bps wider than deals from late July and early August. And the BBB-minus classes priced at 440 and 475 over, 50 to 85 bps wider than the previous four conduits to price.
General market volatility was to blame, including “heavy supply, typically low August liquidity, an impending rate hike, and general economic uneasiness,” in addition to the central bank of China’s decision to devalue the yuan, according to data firm Trepp.
“Spreads moved sharply wider over the last five business days as the latest conduit deals priced at 2015 wides… [and] general market volatility weighed on the sector,” the firm stated in a memo.
The market stabilized slightly on Friday as traders updated their inventories and runs to reflect the new market conditions, but that resulted in very light trading, with less than $50m out for bid. The GSMS 2007-GG10 A4 bond ended at 119 basis points over swaps, one basis point tighter for the day; and the CMBX 6 AAA spread was down two basis points to 85 and the CMBX 6 BBB- spread moved in one basis point to 315.
As previously reported, CMBS originators are cautious as widening spreads lead to slim profit margins. This has yet to have a noticeable impact on curtail issuance — year-to-date CMBS issuance stands at more than $60bn, and Trepp analyst Sean Barrie didn’t anticipate a noticeable impact.
“Spreads can be so volatile that after a down week, they’ll tighten back up shortly after,” he told Real Estate Capital. “Since most securitizations take a bit to price, any short-term volatility really won’t dampen the pace of issuance.”
That said, originators have become wary.
“If you aren’t hedged, the spread widening hurts,” Mike Schulte, who heads up pricing and distribution at Silverpeak Real Estate Finance, previously noted. “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.”