Everyone involved in the origination and underwriting of CMBS conduit loans or the creation and selling of CMBS securities backed by the loans is keenly aware of the swap market. The swap rate is integral to the interest rate charged CMBS conduit loan borrowers and a key factor in the profitability of the sale of CMBS securities.
So CMBS conduit loan originators gleefully watched the 10-year Swap rate steadily decline from a near-term peak of 2.42% at the end of December 2014 to a low of 1.82% in the first week of February 2015. Since the interest rate charged borrowers on CMBS conduit loans consists of the swap rate plus the loan spread, a watchful eye was also on loan spreads to see if they would increase, wiping out the benefit of the declining swap spread. But loan spreads, determined by the market for CMBS securities, generally remained flat. So the majority of the decline in the swap rate resulted in lower loan rates for CMBS borrowers.
“The decline in the swap rate in the beginning of February resulted in CMBS conduit loan rates below 4% for full-leverage, 10-year fixed-rate loans,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “These are amazing rates! Rates under 4% for large, 50% LTV loans are common, but sub-4% for highly leveraged, small balance (< $10 million) conduit loans is a first in the history of CMBS lending.”
Alas, the sub-4% rates were short lived. After bottoming in the first week of February, stronger economic news lifted the 10-year Swap rate to 2.20% in mid-February, increasing CMBS conduit loan rates well above 4% once again for full-leverage, 10-year fixed-rate loans.