6.14.13: CMBS Shops Challenged to Hold Spreads in Tough Market

CMBS conduit loan interest rates, typically set at closing, are based on two numbers added together: the 10-year Swap Rate (Swap) Index and the “Spread” (an amount added to the Swap based on current CMBS bond prices and a profit margin). CMBS conduit loan borrowers are facing a double hit on interest rates as the Swap continues to rise; it reached a 2013 high of 2.43% on Tuesday, June 11 before retreating slightly at the end of the week.  This is an increase of 60 basis points (bp) from 1.82% recorded five weeks ago.  An excellent chart showing the history of the Swap can be found here.

While a 60 bp increase in the Swap is painful enough for CMBS conduit borrowers, trouble is brewing on the CMBS bond side of the equation as well: Bond spreads are widening.  We had a conversation with one of our lending partners about the situation:

Mike and Jim: As I am sure you are aware and noted below, price guidance for AAA CMBS bonds for the JP Morgan deal that is currently in the market is S+103 (previously S+80, so 23 bp wider than 2 weeks ago).  Bond classes all the way down the capital stack are also significantly wider.  Please note that the JP Morgan deal has still NOT priced at these levels as JP has limited bids for its bonds, and thus, the market believes the AAA spreads will be gapping out to S+115 (35 bp wider than 2 weeks ago).

Lending Partner: I am not planning to widen any quotes or loans that are currently under application at this time.  My view is that if the market calms down, credit spreads will tighten back into the S+80 range and there would be no need to change quoted levels.  If that market does not tighten and the Borrower has chosen NOT to rate lock, I may have to widen pricing on a case-by-case basis, but will communicate this to you and the client in advance of closing.

This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , , , . Bookmark the permalink.

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