CMBS conduit loan spreads have increased steadily this fall and many conduit borrowers who have not completed transactions recently are surprised when they receive a Term Sheet reflecting current market spreads. A natural response is “Wow, why is this loan spread so high compared with my last deal?”
First, let’s talk about why the loan spread is important. CMBS conduit loan interest rates are fixed for the life of the loan at closing by adding two indexes together: the loan spread listed in the Term Sheet and the swap spread. The swap spread has been relatively stable over the past four months at 2.00%-2.30%, and is now 2.13% for a 10-year CMBS conduit loan.
The loan spread reflects the spread that dealers sell CMBS securities to investors backed by CMBS conduit loans. CMBS conduit loan originators must charge the borrower a spread that is more than the spread offered to CMBS bond buyers in order to make a profit. As 2015 progressed, CMBS bond buyers demanded more spread to buy CMBS securities. Borrowers can follow this trend by looking at the AAA (10-year) CMBS securities spreads in the chart below; it is not an exact relationship, but roughly a 1-basis-point (bp) increase in AAA (10-year) CMBS spreads equates to a 1 bp increase in loan spread to borrowers:
(10 Yr Spread,
The chart indicates a roughly 50 bp jump in AAA (10-year) CMBS spreads from May until November. So a borrower who may have closed a loan in spring 2015 and earlier at a loan spread of 250 bp that was prevalent at the time would now receive a Term Sheet reflecting a loan spread of approximately 300 bp.