CMBS bond spreads (and hence spreads to borrowers on their loans) and the Swap rate (the index used to set CMBS conduit loan rates) both fell as 2012 progressed; by year-end, the combination resulted in the lowest CMBS conduit loan rates ever recorded. In January 2012, Goldman Sachs priced the only multi-borrower CMBS deal for that month, a $1.15-billion offering that contained 80 loans with an average loan coupon to borrowers of 5.72%. In contrast, in late December 2012, JPMorgan and Ladder Capital priced a $1.07-billion offering that pooled 45 loans with an average coupon of 4.49%.
Can this downward rate trend continue through 2013? “I think not,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “My crystal ball says that if our leadership is unable to reach a deal to fix the automatic spending cuts and tax increases until well into the first quarter of 2013, then rates stay at these levels until the summer of 2013 before rising. But if a solution is reached quickly, I see the equities market rising at a steady pace (along with the economy) and the Treasury/Swap market falling, resulting in higher Swap rates by the end of the first quarter of 2013 and rising further as the year progresses.”
“I see some of the higher Swap rates offset by a modest contraction in CMBS bond spreads, but still see a net increase in loan coupons. I predict a 2.25% 10-year Swap rate by the end of the first quarter of 2013 and a 2.50% average loan spread resulting in 4.75% coupons to borrowers, so line up now to get your money while rates are at a possible low point in the lending cycle,” Sneden said.