The spread on the super-senior AAA-rated class of CMBS fell to its lowest level in almost eight months, according to Commercial Mortgage Alert. The result reflects pent-up demand due to sagging CMBS issuance so far this year.
Goldman Sachs and Citigroup yesterday placed the long-term, super-senior AAA-rated class of an $802.5-million CMBS offering at a spread of 80 basis points (bp) over swaps. That was in line with the dealers’ price guidance of 80-82 bp and down from the 86-bp level of the two previous CMBS transactions and down from the 90-100 range that prevailed since February. The benchmark spread hasn’t been lower since mid-September, when corresponding bonds from two transactions priced at 78 bp.
“Right now, the lack of supply is probably the biggest factor driving up CMBS prices,” said one investor. “Buyers just don’t have a lot to pick from on the new issue side.”
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 80 bp is roughly 6 bp lower than last week, a CMBS loan application a week ago that had a loan spread of 250 bp would be issued at 239 bp today (6 bp lower).