About six weeks ago, the 10-year Treasury rate surpassed the 10-year Swap rate. For at least the past ten years, the Swap rate had always been higher than the equivalent Treasury rate. The gap between the two indexes was typically 10 basis points (bp). Right now, the reverse is true, the 10-year Swap is 2.14% and the 10-Year Treasury is 2.26%, 12 bp higher than the swap. Since CMBS conduit lenders historically set interest rates on CMBS conduit loans based on the Swap rate, switching to the Treasury as an index would provide higher spreads. Better yet, how about the best of both worlds? Well that’s what happened: See if you can tell the difference between the old provision and the new provision, and what it would mean to the interest rate to the borrower based on the Swap rate and Treasury rate listed above.
Old provision:
The greater of (1) the sum of (a) the 10-year offered side swap rate and (b) 300 bp and (2) 5.0%.
New provision:
The greater of (1) the sum of (a) the 10-year offered side swap rate (or Treasury rate, whichever is greater) and (b) 300 basis points and (2) 5.0%.
Needless to say, we at ValueXpress are negotiating out this new provision before our borrowers execute their Term Sheets for a CMBS conduit loan.
