After long-term super-senior CMBS bonds peaked at 173 basis points (bp) over swaps in May 2016, spreads have steadily declined to 94 bp when Wells Fargo, Bank of America and Morgan Stanley priced the long-term super-senior bonds from the $871-million offering on Thursday, August 4. Rates to borrowers have declined dramatically in response. Market participants point to limited CMBS supply as a contributing factor to tighter pricing. At the end of July, only $39 billion of CMBS deals have been issued compared with $71.9 billion in the year-earlier period. In addition, bond markets in general are stable and investors continue to seek investments that can provide a decent yield in relation to risk. CMBS securities are providing a relatively good yield compared with other debt investments right now.
Typically, when CMBS spreads decline, Swap yields and Treasury yields rise to provide an overall yield “floor” for investors. Recall that the overall yield to an investor in a new CMBS issue is comprised of adding the CMBS bond spread to the Swap spread. In the Wells Fargo, Bank of America and Morgan Stanley CMBS deal, the 10-year swap rate was 1.37% and the bond spread was 94 bp (0.94%). Therefore, the yield to investors for the long-term super-senior bonds was 1.37% + 0.94% = 2.31%. This level is well below the floor of 3.0% that has generally prevailed during 2015-2016.
This outcome is resulting in an interest rate bonanza for borrowers. Borrower rates, which were over 5% as recent as May, have fallen nearly 1% to 4.25%-4.50% for full-leverage cash-out refinance. Large balance, low-leverage loans in primary markets are seeing loan offers below 4.0%!
“We expect to have very busy third and fourth quarters,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have not seen rates this low in over a year-and-a-half.”