Commercial MBS Pipeline Not Dry


As commercial mortgage-backed securities players coalesced in New York City for the CMSA convention last week, a healthy CMBS market priced the GE Capital and Chase Manhattan conduit at some of the narrowest spreads that have been seen in months.

"This deal went fabulously," said Nancy Israel, a director in Chase Securities' mortgage department. "I think it is due to a confluence of events: there have not been that many CMBS issues in the market, nor have there been that many in the corporate market, and also, there is great collateral in this deal."

"This was really good pricing," added another CMBS source from a major trading desk.

Chase sold the $700 million of securities backed by commercial mortgage loans at the narrowest yield spread seen in this sector since May. The collateral was 55% from GE Capital and 45% from Chase, all of which being traditional mortgage collateral.

A $105.9 million portion of five-year triple-A securities priced at 100.5 basis points over Treasurys, in line with the price talk range of 98 to 101 basis points. A $469.3 million portion of 10-year triple-A bonds sold at a spread of 119.25 over, compared with price talk ranging between 120 and 123 over.

According to reports, the last time spreads were at that level was in May, when 10-year triple-A paper from Prudential Securities Inc. sold at 118 basis points over Treasurys. Earlier in May, Chase, the No. 2 U.S. bank, teamed up with First Union Corp. to sell similar issues at a spread of 103 basis points over Treasurys, the narrowest spread of the year.

"Credit spreads in general are tighter by about two or three basis points, including CMBS," said a bond trader. "On the week, we are probably tighter by five basis points since Friday, Nov. 12." The trader added that all mortgage passthroughs are tighter, as well as swaps.

"When things rally, [CMBS] usually outperforms because we are not as liquid as other products," he said. "CMBS is performing very well, and we haven't seen any selling at all."

The next conduit in the pipeline is a $787 million offering by Midland Loan Services and Donaldson, Lufkin and Jenrette Securities Inc. that is going to be priced talked tight to the phenomenal Chase deal, sources say.

For instance, since the Chase transaction was priced at Libor +34 for the five-year, DLJ has price guidance for the five-year at Libor +33-35. Similarly, the 10-year in the Chase deal was priced at Libor +40, so the price guidance for the DLJ deal 10-year is Libor +39-41.

"What they are basically saying is, [DLJ] should trade on top of Chase," said the CMBS trader. "If DLJ is out with guidance already, as they are, they will probably let it go over the weekend and launch it early next week, pricing it the day after."

Bank of America is said to have another conduit in the wings that may or may not come before the end of the year. Just last week B of A was successful in selling its $1.1 billion offering backed by a mix of conduit and seasoned loans. An 8.6-year, triple-A class was priced at 127.5 basis points over Treasurys. This deal was considered to have done very well by market sources, considering its complexity.

"There was only $114 million in that conduit long triple-A, a small class, so they did not get penalized very much for it," said a source.

Another deal that is expected before year-end is a conduit from First Union Capital Markets and Merrill Lynch & Co., though it is not clear if it will be launched in December or held over to next year. Additionally, Salomon Smith Barney is currently working on three CMBS deals for first quarter 2000, and Warburg Dillon Read is also said to be entering the CMBS mix in 2000.