Los Angeles – February 28, 2019 – Life companies intend to be very active in 2019 and there is still postive relative value in CML’s as compared to alternative investments. Significant spread compression has occurred in “BB” corporate bond spreads, which have tightened 41 bps this month (-15.89%) while “A” rated CMBS bond spreads declined 43 bps (-20%). “A” and “BBB” corporate bonds also saw a decrease in spreads, but not as significant for this month representing a decline of 4 and 5 bps, respectively. There is downward pressure on CML spreads due to the perceived lack of supply for good quality lending opportunities and postive relative value as compared to other asset classes. For historical reference, the average ACLI CML spread over the last three years has represented an 80 bps premium to “A” rated corporate bonds. In 2018 that premium decreased to 61 bps over “A” rated corporate bonds. Considering the current “A” rated corporate bond spread of 90 bps for the index, an average CML spread of 170 bps would be consistent with the three year historical average spread premium to the “A” rated corporate bond index. But, it is notable that average CML spreads are currently wider than the “BBB” corporate bond index (151 bps), which has historically traded 30 bps inside the “BBB” corporate bond index.
After a quiet January with no new conduits pricing, we had a relatively busy February with 6 conduit deals pricing for a total of $4.99b. The AAA LCF priced in a relatively wide range of S+91-98, with the AA- tranche pricing in a range of S+125-150, and the A- pricing in range of S+170-220. Interestingly, the wide end of the range for all three classes was roughly where the tight end of the range was in December for each class (S+99, 150 and 225 for AAA, AA- and A- respectively), although generically the pricing was much better in February. In the SASB space, 7 deals priced for $1.69b, with 5 floating rating deals making up the bulk of the issuance. Also, two CRE CLO’s priced for a total of $1.6b. Both CRE CLO’s included revolving periods that allow for reinvestment, which is becoming the more common structure. In secondary, spreads generally tightened across the board. AAA spreads tightened by roughly 1-3bps, while AA- tightened by 5-10bps. Both A- and BBB- tranches tightened by around 10-20bps.
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