Rates on 5-year CMBS conduit loans are higher than loans with a 10-year term, and the difference between the two appears to be increasing. Normally in commercial lending, when the 5-year Treasury or libor swap rate is lower than the 10-year Treasury or libor swap rate, loan rates on deals with a 5-year term will have a lower interest rate than deals with a 10-year term. Oddly, this is not currently the case with CMBS conduit loans.
“We recently closed a $12-million hotel loan with a 5-year term,” said Jim Brett, senior loan underwriter at ValueXpress. “The loan was committed at the end of April and the application was signed in March. The borrower was given both a 5-year and a 10-year option.”
“The 5-year option was offered at the 5-year swap rate plus 485 basis points (bp), while the 10-year option was at the 10-year swap rate plus 360 bp. At application, the proposed rate on the 5-year deal was 5.85%, while the proposed rate on the 10-year deal was 5.75%. While the difference between the two deals was relatively small, it still seemed odd that the 5-year deal carried a potentially higher rate. The borrower selected the 5-year rate because it provided more flexibility should values increase in the next five years.”
“When the deal was committed, the difference between the two deals worsened. The spread on the 5-year deal increased to 500 bp, while the spread on the 10-year deal declined to 340 bp. The proposed rate on the 10-year deal was 5.40%, while the 5-year deal had soared to over 6.0%, based on the corresponding 10- and 5-year libor swap rates of 2.0% and 1.1%, respectively, at commitment.”
“The increase in the 5-year rate was distressing to the borrower,” Brett said. “The deal manager from the investment bank explained that 5-year CMBS bonds do not trade well in the market, translating to higher rates to borrowers.”