CMBS conduit loan borrowers are finding calm waters as spreads on CMBS securities have been stable at attractive levels for most of 2017 to date. In addition, the 10-year Swap rate, the benchmark index for setting interest rates on CMBS conduit loans, has remained in a relatively narrow range of roughly 2.10%-2.30% since April. It is currently 2.15%. Interest rates for CMBS conduit loans are set by adding the 10-year Swap rate and the loan spread, which is derived from CMBS securities prices. The two indexes are added together at loan closing to set the interest rate, which will remain fixed for the entire loan term.
On the CMBS securities side, long-term, super-senior AAA-rated securities continue to trade at under 100 basis points (bp) over swaps, having broken the barrier at the beginning of February 2017 for the first time since mid-2015, with the exception of one very high-quality offering in August 2016. The market for long-term, super-senior AAA-rated CMBS highly correlates to borrower interest rates for CMBS conduit loans. Four CMBS deals are currently being marketed with long-term, super-senior AAA-rated securities at 92-95 bp over swaps, right in the middle of the range for CMBS deals that have priced since February.
Market professionals point to relatively low CMBS supply keeping a check on increases in CMBS spreads. The industry appears to be on track to slightly exceed last year’s CMBS issuance total of $76 billion, but indications are the industry could absorb $100 billion annually. In addition, CMBS investors note that the loan quality is improving and leverage decreasing in transactions, reducing perceived risk in the bonds.
As a result of steady swap and CMBS securities prices, CMBS borrowers are seeing stable interest rates while loans are processed to closing, and therefore, loans are closing at rates close to levels indicated in their Term Sheets. Low-leverage CMBS loans are being closed in the 4.25% area and full-leverage loans are being closed in the 4.75% area. The rate is fixed for the entire loan term.