Non-Agency RMBS –Brian Choi

National home prices continued to increase at an accelerated pace in October, improving 19.8% YoY according to the latest data from Corelogic. The strength of the housing market continues to filter through to Non-Agency RMBS bond performance via lower loss severities and higher no-loss liquidations. Similarly, borrowers in serious delinquency and COVID-related forbearance declined this month. The estimated cumulative cure rate from COVID-related forbearance is now 70-88%, according to Nomura. While fundamentals in housing remain solid, concerns around inflation and direction of monetary policy led to a selloff in rates this month, particularly at the front end of the curve. For reference, 3yr swap rates started the month at 62 basis points (bps) and ended the month at 96 bps, a 34 bp difference. 10yr Treasuries started the month at 1.46%, sold off 24 bps to 1.70% mid-month, and ended the month at 1.55%, a 9 bp difference. This selloff in rates and elevated rate volatility, coupled with heavy new issuance supply, led to mixed performance across Non-Agency RMBS subsectors.

Secondary trading activity picked up slightly month-over-month with $4 billion in BWIC supply and TRACE reporting $7.8 billion in total trading volume in October. That said, volumes are still light compared to historical levels. With strong housing fundamentals alongside limited supply, legacy RMBS spreads were resilient to the rates move and volatility in October. Legacy pass-through bonds ended the month unchanged in the +125-135 spread context. In contrast, the primary market placed another $17 billion in new issuance this month, bringing total RMBS new issuance volumes to $139 billion YTD – well above the prior post-GFC high water mark of $128 billion, set in 2019. After exhibiting low volatility and tighter spreads all year, certain subsectors reversed course and widened considerably in October. In the re-performing/non-performing sector (RPL/NPL), unrated senior bonds started the month pricing at 1.9-2.0% yield and ended the month pricing around 2.5% yield context, approximately 20-30 bps wider in spread and 50 bps wider in absolute yield. In the non-qualified mortgage sector (non- QM), spreads across the capital structure are now at or close to the wides seen in 2021. Spreads at the top of the capital structure widened out 25-30 bps to +95-100 spread context. Down the capital stack, B1 and B2 subordinate bonds widened 45-55 bps into the L300s and L400s spread context, respectively.

Monthly New Issue Volume

Source: Bank of America

Unrated NPL/RPL Seniors 

Source: TCW

Non-QM Pricing Spreads

Source: TCW

CMBS – Sagar Parikh

October was a positive month in CMBS when looking at collateral performance. CMBS conduit credit continued to improve with delinquencies falling to 5.1% from 5.4%. Lodging delinquencies, in particular, continued to drop with delinquencies declining from 10.2% to 9.3%. Loans in special servicing dropped for the sixth consecutive month, decreasing from $17.7 billion to $17.3 billion. Approximately $1.2 billion (8.9%) of September’s delinquent loans became current or resolved in October. Of the loans that became current or resolved in October, the largest proportion was secured by lodging (41.9% of loan principal balance), followed by retail (41.6%), and office (8.4%). Of new delinquencies in October, the largest office delinquency was the Princeton Pike Corporate Center, a $128.8 million loan participated across four transactions (BACM 2016-B10, MSBAM 2016-C29, MSBAM 2016-C28, and MSC 2016-UBS9). Princeton Pike is secured by a suburban office complex in Lawrence Township, New Jersey. The loan was transferred to special servicing in April but managed to remain current through September.

Of the loans that were resolved during the month, the $164 million Mall St. Matthews and the $110 million Grand Beach Hotel properties were the largest to no longer be classified as delinquent during the month. Mall St. Matthews, a regional mall in Louisville, Kentucky, was transferred to the special servicer in June 2020 after having failed to pay off at maturity. The status of the loan switched to performing matured from non-performing matured this month. The Grand Beach Hotel, meanwhile, is secured by a full-service hotel in Miami Beach that was transferred to special servicer in May 2020 and had remained delinquent until this month. In terms of loans that were liquidated during the month of October, the two largest were for retail properties from the 2013 vintage. The Sarasota Square Mall in Florida was resolved with a 35% loss severity while the Summerhill Square retail loan in New Jersey was similarly liquidated with a 30% severity. Both loans had been in special servicing since March 2020 and the severities were lower than initial expectations. Below is a list of the largest loans liquidated during the month of October from Kroll:

Loan Dispositions in October (> $10 million)

Source: KBRA, Trepp

In terms of appraisal reductions, 26 loans across 27 distinct conduit deals reported appraisal value reductions in October. The weighted average reduction was 49% below the loans’ original underwritten values, partly driven by heavy appraisal reductions for some regional mall loans. The majority of conduit loans that received appraisal reductions were 90-120 days delinquent or in foreclosure/REO as of October. The largest loans to receive appraisal reductions during the month were the Mall St. Matthews (discussed earlier) as well as two regional malls from 2011 (Arbor Walk in WFRBS 2011-C5 and Sangertown Square in JPMCC 2011-C3).

Source: Bank of America

Turning to new issue, October was the highest monthly issuance of private-label CMBS since 2007, with over $17 billion pricing during the month. Total CMBS Issuance for the year is now expected to exceed $250 billion (inclusive of CRE CLO and agency CMBS). The bulk of the issuance in October came from the SASB market, with $16+ billion pricing during the month. Year to date, SASB issuance totals $61+ billion and is anticipated to exceed $75 billion for the year. Inclusive of CRE CLOs, private label CMBS issuance is expected to exceed $120 billion.

The largest SASB transaction to price during the month was the $2+ billion WPT Industrial transaction. The portfolio represents acquisition financing for Blackstone’s purchase of the formerly publicly traded Canadian REIT WPT. Prima Capital was the HRR for the transaction (priced at L+595) and also bought a portion of the NR-rated H tranche (which priced at L+415). The HRR came in at a decent basis versus the previous multi-billion industrial portfolio transaction from Citigroup (2021-ELP) which was syndicated to Oxford Properties at L+500.

ABS – Tony Lee

The securitization industry once again convened in Las Vegas for the Structured Finance Association’s annual conference at the beginning of October. This conference was last held in February 2020, just weeks before the country went into lockdown (the original February 2021 date for this year’s conference was postponed). Themes emerging from the conference included an increased focus on environmental, social, and governance (ESG) investing, supply chain issues, and the search for yield in specialized ABS. Despite a relentless stream of new issue ABS supply following the conference, sentiment remained strong in October. The ABS market priced $25.1 billion during the month, bringing YTD gross issuance to $226 billion. This has been the most active year for issuance since the GFC, with supply easily surpassing 2020’s FY total of $175.3 billion.

Despite some rate volatility during the month, ABS spreads mostly remained firm. Large franchise chains continue to tap the ABS market. For example, Dunkin Brands (operator of Dunkin Donuts) issued a $2.35 billion BBB-rated whole business ABS securitization with 5yr, 7yr, and 10yr tenors. Pricing yields on the deal ranged from 2.05% to 2.8% (~87 bps to ~124 bps spreads to swaps).

Prime auto lease ABS has historically priced wider than prime auto loan ABS. With the rise of used car vehicle values in 2021, however, we’ve seen that basis narrow throughout the year. For example, Nissan priced a $1.0 billion prime auto lease ABS right on top of where GM priced its $1.25 billion prime auto ABS in October. In auto lease ABS, most of the credit risk lies in the residual value of the vehicle where the car buyer (lessee) has the option to either buy the car at a pre-determined price after a specified period of time (typically 24-36 months) or return it to the lessor. When lessees default, auto lease ABS investors are secured by the vehicle’s residual value. Auto lease ABS net credit and auto lease residual values exhibited losses in May 2020, but the rise in used car values since has driven auto lease ABS residuals to deep gains.

Manheim Used Vehicle Value Index

Source: Cox Automotive

Net Credit and Auto Lease Residual Value Losses

Source: Bank of America Research

CLO – Palak Pathak & Madison Perry

CLO Secondary
CLO performance in October continued its steady pace with new issuance and secondary volumes high but demand readily available to absorb the supply. In fact, spreads were slightly tighter over the month, especially down the stack. As rates continued to back up, floating rate CLOs and loans garnered more interest and outperformed other asset classes over the month. CLOs returned +0.20% in October, outperforming HY Credit (-0.17%), underperforming Loans (+0.27%) and on par with IG Credit (+0.22%).

Similar to previous months, the top of the CLO stack was unchanged in October as demand remained elevated and CLO prices were capped at a slight premium to par due to callability. AAAs remained well bid in the secondary market. The execution on an $830 million AAA BWIC sale was a testament to that demand. The list traded very well with all bonds covering at a premium and spreads averaging ~100 DM. The trading volume and demand at those levels was a great demonstration of the liquidity that is available on CLO AAAs.

AAs were also very well bid over the month, with even recently issued 2021 vintage AAs trading inside new issue levels in the 150s DM context. BBBs and BBs were 5-10 bps tighter as demand for shorter, discount bonds was evident as BWIC covers were in the mh200s and mh500s DM, respectively.

Equity trading picked up significantly in October with over $550 million in BWIC activity. As per Kopentech (a CLO data provider), YTD equity BWIC volume is now $4.5 billion, up 55% YTD versus 2019 and 2020, both at $2.6 billion. CLO equity payments were also very strong with median payments of 3.9%, a 15 bp increase.

CLO BWIC activity doubled month over month to $3.7 billion with TRACE reporting total transaction volume of $13 billion. IG trading rose over 80%, the largest IG volumes we have seen since early this year. Dealers got net longer in both IG and non-IG securities over the month by almost $1 billion. We view this as a result of the heavy AAA and CLO equity BWIC volume.

Secondary CLO 2.0 Total Returns

Source: J.P. Morgan CLOIE Index

Secondary CLO 2.0 Spreads (DM)

Source: TCW

CLO Primary
The CLO primary market continued to out-do itself in October by issuing a record-breaking $19.5 billion in new securities across 35 deals. The upcoming LIBOR transition was at the forefront of everyone’s mind as managers were in a mad dash to issue their last LIBOR based deals prior to the transition to the secured overnight financing rate (SOFR) in 2022. For the same reason, refi/ reset volumes were also robust with $8.2 billion in refi volume and $16.1 billion in reset volume pricing over the month. YTD issuance reached $149 billion in October, yet again beating out projections and keeping issuance on track to hit or even exceed 2021 new issuance estimates of $160 billion.

Despite the heavy volume, CLO spreads on top-tier 5nc2 new issue deals remained surprisingly flat for AAA through single-A tranches and even 5 bps to 10 bps tighter in BBB and BB tranches, ending out the month with AAAs at 113 bps, AAs at 160 bps, As at 195 bps, BBBs at 295 bps, and BBs at 615 bps. The CLO arb remains attractive with range-bound liability pricing and primary loan spreads remaining wide. With effective WAS increasing by 3 bps over the quarter, combined with lower liability costs due to refis and resets, median CLO equity payments remained robust.

In another “first,” the first SOFR-backed CLO tranche priced in October. The tranche was issued as part of a reset transaction with a three year reinvestment period and one year non-call period. The AAAs were split into a LIBOR and SOFR based note. The LIBOR-linked tranche priced at L + 109 with the SOFR-based tranche at S + 124, implying a 15bp spread basis between the SOFR and LIBOR tranches.

The AAA term curve remained steep with shorter refis continuing to price in the 90s DM and longer deals in the 113-120 DM range. Middle market issuance has remained robust, with five deals pricing $3 billion of securities over the month. Middle market AAA spreads remained flat at 150 DM with some deals looking to price inside of that in November. YTD middle market issuance currently stands at $13.8 billion, handily exceeding 2020 FY volume of $11.3 billion.

CLO New Issuance

Source: TCW

Tier 1 New Issue Spreads (5nc2)

Source: TCW

CLO Fundamentals
CLO fundamentals mostly improved month over month, with WARF levels down 15 bps and the percentage of defaulted assets remaining close to zero. CCC/Caa exposure was down another 20 bps over the month. Junior OC cushions continued to improve with the reduction in CCC/Caa assets and are quickly approaching pre-COVID levels. Value metrics improved over the month with median equity NAVs up 2 points to $67 and BB MVOCs up 30 bps to 107%.