Financing Today

New offerings continue testing CMBS market depth Commercial mortgage rates trended lower during September, aided by a surging Treasury market. With Treasuries down almost .375% in less than two weeks, borrowers rushed their deals into the market to take advantage of the new lower rates, according to the Barron's/John B. Levy & Co. National Mortgage Survey of institutional lenders and investors in the market for commercial mortgage-backed securities (CMBS).

While the whole-loan business was enjoying a welcome spurt of new loan demand, the CMBS market was smack in the middle of digesting a record $8 billion in expected new offerings. To be sure, both buyers and sellers were a little uncertain as to how well the market would react to the quarter-ending torrent of business. As one large money manager commented, "My crystal ball is a bit murky."

In late September, the market received and priced the largest conduit transaction ever -- a $1.5 billion offering backed by more than 350 loans gathered by GMAC Commercial Mortgage Corp., Deutsche Bank and ContiTrade Services. Underwriters were led by Deutsche Morgan Grenfell and Lehman Brothers. The deal included the largest single CMBS tranche to date -- the 'AAA' rated Class A-3, which totaled almost $725 million. Despite the size of the total offering and the A-3 tranche at a spread of .65% -- though .03% to .05% wider than the previous low -- was right at the price talk level. The Class-E tranche, rated 'BBB/Baa2', didn't fare as well. The spread was priced at 1%, fully .10% wider than the price talk, to the surprise of both buyers and sellers. In fact, buyers had been privately told to expect a spread of .87% to .88%. According to one money manager who participated in the offering, the widening was merely a necessary "technical adjustment" to keep 'BBB' CMBS appropriately priced relative to corporate offerings and was not a reflection of any overall concern about the real estate market. Other 'BBB' buyers noted that the spread widening was appropriate and necessary because higher loans-to-value and higher values had made 'BBB' prices "a bit frothy." Nevertheless, the GMAC Commercial Mortgage securitization confirmed for all participants that the days of constant spread tightening were over, and that in the future spreads would fluctuate in keeping with supply and demand trends as they would in any mature market.

The CMBS business has become quite seasonal with dealers rushing to offer their products at the end of each quarter. That was clearly the case at the end of the third quarter and was also true at the end of the second quarter. One CMBS buyer was delighted with the glut of new offerings because he expected it would lead to widening spreads and, in his view, offer a "significant buying opportunity." But there will be no respite as the fourth quarter begins. At least three new securitizations, ranging from $750 million to $1.5 billion, from Lehman Brothers, Nomura and Morgan Stanley, will continue to test the depth of this relatively new market.

On the whole-loan side, most institutional lenders are finding that they're competing not only among themselves, but with the CMBS market. The recent drop in interest rates has led to a spurt in new loan requests, and institutions are hopeful that they can commit and close these by year's end. In an attempt to compete with the CMBS market, a number of life insurers have narrowed their spreads and dramatically shortened the commitment process. For smaller loans, generally less than $20 million, a few institutions no longer require a formal loan committee, which should greatly speed up their commitment process. Others are continuing to lower their minimum spreads so that transactions which qualify for spreads of less than a hundred over comparable Treasuries are becoming more commonplace.

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