CMBS conduit loan rates are holding relatively steady despite market turbulence surrounding the European debt crisis. Fixed income professionals are increasingly worried about whether Greece will exit the European Union and whether debt-related trouble will spread to Spain, Italy and Ireland. Relative volatility in financial markets is high, potentially affecting CMBS spreads and hence CMBS conduit mortgage spreads, but so far the impact has not had a dramatic impact on rates to borrowers.
CMBS spreads did widen on the most recent CMBS issue, a $1.1-billion transaction that RBS and Wells Fargo priced on June 7. The $418.0-million super-senior class of 9.9-year bonds priced in line with guidance at 140 basis points (bp) over swaps. But among the subordinate bonds, the $82.8-million junior triple-A rated bonds and $58.0-million double-A rated bonds both priced 5 bp wider than guidance, at 205 bp and 280 bp over swaps, respectively.
Although CMBS spreads have widened and spreads on loan quotes to borrowers have widened by about 15 bp, all-in borrower rates have not changed much because the swap rate has decreased by approximately the same amount. A typical $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is seeing a CMBS conduit spread quote of 290 bp over the 10-year libor swap. Four weeks ago, the resulting interest was 4.80%; two weeks ago, the rate was 4.60%; and today with the 10-year swap at 1.80%, the borrowing rate is 4.70%. So the all-in rate has been range-bound despite all the debt challenges in Europe.
CMBS spreads will be tested in the next few weeks as issuers prepare to sell $6 billion in CMBS in five multi-borrower CMBS issues that are expected to price by the end of July. The supply of bonds, together with market uncertainty, could result in additional spread widening.