The deal did not come easily. The banks had to discount the AAA-rated tranche by 235 basis points over the 10-year swap rate, the widest margin ever. Guidance had been 200bp. By comparison, the same sort of deal 12 months ago would have yielded 30bp.
But bankers crossed their fingers that this pioneering effort will lead the way for other deals in a badly struggling market. Blackstone Group has been expected for some time to bring the largest ever CMBS, possibly as much as $11 billion, backed by its recently acquired Hilton Hotels portfolio.
But market analysts are not optimistic for the market this year. RBS Greenwich Capital predicts US CMBS sales will fall by 66% in 2008 to $80 billion. This slump will follow 2007 when $234 billion of new CMBS was issued. The first quarter alone produced $62 billion.
The market has tightened its belt in expectation of a slow first six months and January certainly lived down to expectations with an entirely deal-free month. Citi analysts said this is the first time that has happened in the markets 20-year history.
As the deal went through, Merrill Lynchs index of AAA-rated CMBS, which makes up about 75% of the market, showed a 4.7% loss to the end of February 2008. CMBS are trading at record high yield spreads over swaps and US treasuries. The average spread over US treasuries of similar maturity on AAA-rated 10-year CMBS rose 26% to 283bp in the week of the deal, according to Morgan Stanley data. Spreads over 10-year swap rates, the benchmark used to price the Morgan Stanley deal, rose 34% to a record 219bp.
For the Morgan Stanley and Bear Stearns deal, half was in the top-rated tranche, priced to yield 6.75%. The securities are backed by loans on the $84 million Shadow Lake Towne Center, a shopping centre in Papillon, Nebraska, as well as a Hilton hotel in Indianapolis, a Washington DC shopping mall and a General Electric healthcare centre in Wauwatosa, Wisconsin.
Kara McShane, Morgan Stanleys head of CMBS syndicate, said at deal time that it was "clearly unusual" for the bank not to have completed any CMBS deals up to mid-February. McShane said the bank would normally have expected to do a couple of deals by then, with other banks producing similar numbers.
But investors are clearly worried that mortgage-backed bonds have insufficient protection. Prices have fallen in securitized debt across the board, whether backed by government-guaranteed student loans or sub-prime mortgages.
Delinquencies in the $760 billion US CMBS market fell in January to a record low 0.27%, according to Fitch but they are widely expected to rise and bond ratings are also predicted to suffer downgrades.