CMBS conduit loan borrowers are finding calm waters as spreads on CMBS securities have been stable at attractive levels for most of 2018. This has help offset the rise in the 10-year Swap rate, minimizing the impact on interest rates for CMBS conduit loan borrowers.
The 10-year Swap rate, the benchmark index for setting interest rates on CMBS conduit loans, has drifted higher in 2018. The 10-year Swap rate started 2018 at approximately 2.50% and now sits around 3.00%, up 50 basis points (bp). 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.
Since spreads on CMBS securities are stable at attractive levels, loan spreads for CMBS conduit loans have decreased about 25 bp and even more for low leverage deals. Stable loan spreads are enabling CMBS conduit loan originators to tighten spreads and accept lower profits as they are not pricing any market volatility into loan spreads, benefitting borrowers.
As a recent example of stable loan spreads, Citigroup and Cantor Fitzgerald priced the benchmark super-senior AAA-rated CMBS bonds of a $668.2-million conduit offering this week at 87 bp over swaps, within a range of 79-92 bp prevalent since March. Market professionals point to relatively low CMBS supply keeping a check on increases in CMBS spreads. Although overall year-to-date CMBS volume is on track with last year, many originators are struggling to keep pace.