With fresh allocations of money to invest, Commercial Mortgage-Backed Securities (CMBS) buyers were lining up to place orders for the first CMBS conduit offering to hit the market in 2018. With more investor demand than supply of CMBS bonds, dealers are tightening the spreads across all bond classes. Price guidance on the super-senior AAA-rated class of the latest $1.2-billion offering, which is being led by Deutsche Bank, JPMorgan and Citigroup, was 69 basis points (bp) over the swap rate, the lowest spread since the financial crisis. Spreads on the super-senior AAA-rated class of CMBS were averaging 84 bp in December.
Why do borrowers and loan originators care? Interest rates charged borrowers for a CMBS conduit loan is comprised of two components: the loan spread and the swap rate. The loan spread is derived directly from the pricing of CMBS in the market. Lower bond spreads equate directly to lower CMBS conduit loan spreads in a borrower’s loan application for a CMBS conduit loan. While not a direct correlation, a 1 bp decrease in super-senior AAA-rated class CMBS roughly equates to a 1 bp drop in loan spread. As a simple example, since 69 bp is 15 bp lower than the 84 bp in December, a CMBS loan application in December that had a loan spread of 265 bp would be issued at 250 bp today.
The reduction in loans spreads is helping to offset a gradual rise in swap rates, keeping interest rates to borrowers stable.
The swap rate is the second component that is utilized to determine a fixed interest rate for a CMBS conduit loan, keeping interest rates to borrowers stable in the 4.50% area for low leverage loans. Full-leverage loans are being closed in the 4.75% area. To obtain loan spread and swap rate information, visit https://www.valuexpress.com/pdf/ve_rateSheet-CMBSconduit.pdf, where rates are updated every Monday.