By the Numbers
Spreads, capital give CMBS an edge to corporates for life insurers
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Poor execution on recent new conduit CMBS deals has pushed spreads on ‘AAA’ 10-year classes to surprisingly wide levels against corporate debt. Life insurers in particular should take a close look at these long cash flows. Insurers now can add ‘AAA’ CMBS at spreads comparable to ‘A’ corporate debt, for instance, while tying up less than 20% as much risk-based capital.
Spreads on the longest ‘AAA’ conduit CMBS classes have traded recently in the range of 110 bp over the Treasury curve (Exhibit 1). The median spread for these classes over the last five years has been 83 bp. These classes have closed wider than current levels on less than 10% of all trading sessions in the last five years, and most of those sessions came with the onset and in the immediate aftermath of pandemic.
Exhibit 1: Current ‘AAA’ CMBS LCF spreads, at 110 bp, have wider in less than 10% of all trading sessions in the last five years
Source: Bloomberg, Amherst Pierpont Securities
CMBS has widened along with all risk products, of course. The reasons have been pretty clear: inflation has persisted, the Fed has become more aggressive and now war has started in Ukraine. But conduit CMBS has been particularly hit. This is clearest compared to investment grade corporate debt.
Compared to hard-to-find ‘AAA’ corporate debt, ‘AAA’ CMBS is now trading roughly 41 bp wider than the average outstanding issue captured in the ICE BoA US Corporate AAA Index (Exhibit 2). ‘AAA’ CMBS in the last five years has traded at a median 22 bp wider than ‘AAA’ corporate debt. CMBS has traded wider than 41 bp to ‘AAA’ corporates in less than 8% of trading sessions in the last five years, all in the aftermath of pandemic.
Exhibit 2: ‘AAA’ CMBS LCFs are trading 41 bp wide to ‘AAA’ corporates
Source: ICE BofA AAA US Corporate Index Option-Adjusted Spread retrieved from FRED, Bloomberg, Amherst Pierpont Securities
Compared to ‘AA’ corporate debt, ‘AAA’ CMBS is now trading roughly 27 bp wider (Exhibit 3). ‘AAA’ CMBS in the last five years has traded at a median 17 bp wider than ‘AA’ corporate debt. CMBS has traded wider than 27 bp to ‘AA’ corporates in less than 9% of trading sessions in the last five years, all, again, in the aftermath of pandemic.
Exhibit 3: ‘AAA’ CMBS LCFs are trading 27 bp wide to ‘AA’ corporates
Source: ICE BofA AA US Corporate Index Option-Adjusted Spread retrieved from FRED, Bloomberg, Amherst Pierpont Securities
Finally, compared to ‘A’ corporate debt, ‘AAA’ CMBS is now trading roughly 3 bp wider (Exhibit 4). ‘AAA’ CMBS in the last five years has traded at a median 5 bp tighter than ‘A’ corporate debt. CMBS has traded wider than 3 bp to ‘A’ corporates in less than 9% of trading sessions in the last five years, all in the aftermath of pandemic.
Exhibit 4: ‘AAA’ CMBS LCFs are trading 3 bp wide to ‘A’ corporates
Source: ICE BofA Single-A US Corporate Index Option-Adjusted Spread retrieved from FRED, Bloomberg, Amherst Pierpont Securities
With the advent of new NAIC risk-based capital factors for life insurers, a ‘AAA’ position ties up only 16 bp of risk-based capital compared to ‘A’ risk-based capital of 82 bp (Exhibit 5). This seems like fairly clean relative value. A life insurer can get roughly equal spread but tie up less than 20% of the risk-based capital. Even for insurers that are not capital constrained, CMBS looks much more capital efficient.
Exhibit 5: Old and new life insurance risk-based capital factors
Source: NAIC, Amherst Pierpont Securities
In fact, given the spread and capital requirements, ‘AAA’ CMBS seems like stronger relative value to ‘AAA’, ‘AA’ and ‘A’ corporate debt. Life insurers should give a close look at redirecting new cash from corporate debt into 10-year CMBS.
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