By the Numbers
Conduit CMBS last cash flows linger wide to corporates
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.
The ‘AAA’ last cash flow classes of conduit CMBS, whose spreads roughly track their ‘AAA’ corporate cousins, remain stalled at recent wide spreads despite tightening in corporate credit. The dislocation offers an excellent relative value opportunity for investors to pick up seasoned ‘AAA’ LCF pieces about 75 bp wide of ‘AAA’ corporates. The opportunity is particularly compelling for insurance companies, where recent rule changes by NAIC have significantly lowered capital charges for ‘AAA’ securities relative to other ratings categories.
Investment grade corporates tighten while CMBS lags
The Bloomberg aggregate investment grade corporate bond index touched post-pandemic option-adjusted spread (OAS) wides of 172 bp on May 20 but have since retreated by 20 bp to 152 bp (Exhibit 1). The ‘AAA’ securities in the index have been less volatile overall but show similar dynamics. ‘AAA’ corporate spreads hit 72 bp on May 20, below the post-pandemic wide of 83 bp in early March 2022. Similar to the broader investment grade index, ‘AAA’ spreads have tightened about 10 bp to 61 bp.
Exhibit 1: Investment grade vs CMBS last cash flow OAS
Note: Spreads as of 5/31/2022.
Source: Bloomberg, ICE BofA US Corporate AAA Index OAS from FRED, Amherst Pierpont Securities
‘AAA’ last cash flow (LCF) conduit CMBS broadly track the investment grade bond market, in particular ‘AAA’ corporate sector, though spreads between CMBS and IG corporates have diverged during this latest move. CMBS ‘AAA’ LCF spreads stabilized during the last week of May but did not tighten and now stand at 135 bp. The spread difference between CMBS ‘AAA’ LCF and ‘AAA’ corporates is currently 74 bp, a level not seen since the dramatic pandemic driven spread widening during the March to May period of 2020. The spread difference between the two ‘AAA’ indices has averaged 28 bp over the past three years.
Prefer seasoned LCF with moderate office exposure
The advantage of seasoned deals is that the pandemic stress has provided a window into long-term performance. For example, CF 2019-CF3 A4, a ‘AAA’ LCF class, is fairly representative of the sector (Exhibit 2). The bond has a 3.0% coupon, a current J-spread of 125 bp, a discount dollar price and an average life of 7.5 years. And credit support has increased a bit above 30% thanks to modest paydowns.
Exhibit 2: Example of a clean, seasoned AAA LCF
Note: Indicative pricing as of 5/31/2022. Please contact desk for updated level.
Source: Bloomberg, Amherst Pierpont Santander
Office exposure is 35% of the deal, which is in line with its representation across conduit deals. Hotel exposure is low at 6% and residential is relatively high at 27%. There is one loan representing 3.2% of the balance currently in foreclosure. The single loan in foreclosure is actually secured by six small multifamily properties in Brooklyn, NY. The loan defaulted and the borrower requested forbearance a few months into the pandemic. The borrower recently requested that the foreclosure process be terminated and is awaiting a court decision. Given the borrower’s request to terminate foreclosure and the exceptionally strong property price appreciation during the pandemic, it seems likely that the loan will either cure or the losses due to foreclosure will be minimal.
The relative cost of capital for insurance companies
The wide spreads for ‘AAA’ LCF classes are particularly compelling for insurance companies seeking a higher return. The NAIC at the end of last year lowered capital charges for ‘AAA’ securities and increased charges for most other ratings classes. The capital charges for ‘AAA’ securities are 0.16% with capital at other rating levels substantially higher—between 169% and 1356% of the ‘AAA’ charge (Exhibit 3). For ‘AAA’ LCF classes, a spread of 135 bp equates to 8.4375 bp of spread for every basis point of capital. By comparison, a ‘AA+’ security would need a spread of 228 bp to match the spread per basis point of capital in ‘AAA’; a ‘A-‘ security requires a spread of 861 bp, and a ‘BBB-‘ security would need a spread of more than 1800 bp to achieve a similar return on capital at current spreads of the ‘AAA’ LCF class. Investors are unlikely to find corporate debt offering these breakeven spreads.
Exhibit 3: Breakeven spreads across NAIC rating categories
Note: *Spread needed to match the ‘AAA’ spread per basis point of capital of (135 / 16 ) = 8.4375.
Source: NAIC, Amherst Pierpont Santander
The long end of the yield curve has stabilized, and the equity market has found a footing. Commercial real estate prices increased modestly across the board in April after stagnating earlier in the year. As duration buyers return to the market, the LCF classes of conduit deals will likely tighten.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
