Los Angeles – March 31, 2018 – Spreads for CML transactions have experienced their own version of March Madness. A growing segment of the life company market has been chasing low to moderate leveraged transactions (60% leverage or less) and cutting their spreads in the process. Given the current treasury yield environment, spreads have dipped to the low 100’s for low leverage transactions. Even some modestly leveraged loans rated CM 2 for Risk Based Capital (RBC) are getting priced in this range by a number of life companies. A smaller segment of the life company market maintains a higher yield target and are willing to increase leverage, offer a longer amortization schedule, provide more flexible prepayment structures, and/or lend in secondary and tertiary markets. Spreads for these transactions range from the 140-190 basis points and are often CM2 rated loans. Agency spreads have widened for the second consecutive month, gapping 6-12 basis points over the past 30 days. This should provide life company lenders an opportunity to compete more effectively in the multifamily space. Most life companies have a positive outlook for the multifamily asset class and have CML portfolios that are underweighted in this product type.
Conduit issuance picked up in March with 5 deals pricing for $4.6b, bringing the YTD total to $9.6b across 9 deals. For the most part, new issue AAA LCF spreads priced in a tight range from S+76-79, with one outlier at S+92. AA- spreads ranged from S+90-95 (with one outlier at 112), while the A- spreads came in at S+150-165 (with one outlier at 230). The LCF bond continues to be a struggle for issuers, as the generic AAA buyers seem to be looking elsewhere for spread/yield. While levels on mezz bonds look relatively solid, subscription levels are still hovering on the lower end (around 1x) for AA- and A- bonds, while BBB and BBB- bonds are seeing strong interest from total return and faster money. In SASB space, $4.48b priced, but it was spread across only four floating rate deals, with no fixed rate deals pricing. Two CRE CLOs also priced this month for a total of $826mm. Secondary spreads generally widened on the month, with AAA LCFs underperforming. AAA bonds ended the month wider by 7-10bps are now slightly wider on the year. A- bonds seemed to hold in the best this month on very limited selling and heavy pent up demand.
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