With recent volatility in the stock market, spreads on CMBS securities have widened. This can affect the loan spread and interest rate to borrowers closing a CMBS conduit loan. But the recent rise in loan spreads has been offset by declines in the 10-year Swap.
Loan interest rates for 10-year CMBS conduit loans are set by adding the 10-year Swap rate and the loan spread found in your CMBS conduit loan Term Sheet. For example if the loan spread is 250 basis points (bp; 2.50%) and the 10-year Swap rate is 3.00%, the loan rate is 2.50% plus 3.00%, or 5.50%. The loan spread is derived from CMBS securities prices. The two indexes are added together at loan closing to set the interest rate, which is fixed for ten years. So any increases in loan spread negatively impact the interest rate to the borrower.
The spread on benchmark AAA-rated super-senior CMBS securities that correlates to borrower loan spread has increased from a range of 85-95 bp in November to 100-110 bp in December. As a result, borrower loan spreads have increased about 20 bp. But during the same period, the 10-year Swap rate has declined from 3.10% to 2.85%, or 25 bp. Therefore, the rise in borrower loan spreads has been fully offset by declines in the 10-year Swap rate, leaving borrower interest rates unchanged from last month. For current CMBS conduit loan spreads and interest rates, click here.