The loan spread in many CMBS conduit loan term sheets executed by borrowers in the past few weeks is not at levels that can be closed profitably, leaving lenders and mortgage brokers in a quandary as to what to do. Loan spreads have moved out anywhere from 10-20 basis points (bp) as the pricing for CMBS securities has weakened recently on a variety of bad economic news, including Greek debt default, collapse of the Chinese stock market and debt challenges in Puerto Rico, all of which has made buyers of bonds, including CMBS buyers, jittery. As a result, with a lot of CMBS supply, dealers are widening spreads to sell all the bonds. Here is a snapshot of super-senior AAA-rated benchmark CMBS spreads provided by a partner:
|Deal Name||Size (mm)||Px Date||Sr AAA|
Each bp increase in the super-senior AAA bonds equals roughly a one-point increase in spread to the borrower to maintain the same profitability. Hence, if the market has moved from S+87 to S+107, which is a total of 20 bp, that means term sheets written when prices were S+87 are under water by 20 bp today, to maintain the same profit.
“Since we are active in the buy-side of CMBS securities, we are familiar with how all this works and we are advising our clients exactly where their loans spreads sit in the market. This way, there is no shock should their spread be adjusted to market levels at closing,” commented Michael D. Sneden, Executive Vice President at ValueXpress.