6.24.13: CMBS Borrowers Shell Shocked over Rapid Rise in Rates

Borrowers are struggling to come to grips with what happened to CMBS loan rates over just a few days since Ben Bernanke spoke at a press conference on Wednesday, June 19.  The 10-year Swap Rate (Swap) Index used to set CMBS conduit rates was at 2.37% that day, already reflecting an increase from just a few weeks earlier.  But what happened during the time Bernanke spoke was stunning.  The Swap increased dramatically, reaching 2.60% by the close of the day and spiking further to 2.86% on Monday, June 24.  Over a span of just three full business days, the Swap blew out 50 basis points (bp)!

To make matters worse, investors in CMBS securities fled the market, unwilling to invest in 10-year CMBS securities with markets volatile and the value of existing CMBS securities falling.  This week, J.P. Morgan was shopping the benchmark 10-year triple-A class of a $961.2-million offering at 125-bp area over swaps. That was 5 bp wider than the comparable long-term, super-seniors from an offering that priced Monday, June 24 and a whopping 22 bp higher than the equivalent tranche of a June 14th deal and an amazing 40-plus bp higher than four weeks ago.

Generally, a 1 bp increase approximates a 1 bp increase in loan spread for a CMBS shop to maintain the same profit margin.  So between 50 bp in Swap increase and 40 bp increase in loan spread, borrower quotes are now 90 bp higher than prior to June 19.

“It’s hard to explain this to borrowers because it’s so dramatic,” said Michael D. Sneden, Executive Vice President at ValueXpress.  “Borrowers think CMBS issuers are not being truthful or are trying to pad their profits or something else to the disadvantage of the borrower, since they have no power over pricing. I send them this 10-Year Swap chart and send them the pricing from recent CMBS deals so they can see what’s happening in black and white.”

“Thankfully, many experts believe the market has overacted (see previous article),” commented Jim Brett, head of CMBS analytics at ValueXpress.  “I hope this is the case as otherwise we could be facing a slow summer in terms of CMBS conduit loan originations.”

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

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