CMBS conduit loan borrowers are finding calm waters as spreads on CMBS securities have been stable for most of 2017 to date. In addition, the 10-year Swap rate, the benchmark index for setting interest rates on CMBS conduit loans, has remained in a relatively narrow range of roughly 2.30%-2.60%. CMBS conduit loans’ interest rates are set by adding the 10-year Swap rate and the loan spread, which is derived from CMBS securities prices. The two indexes are added together at loan closing to set the interest rate, which will remain fixed for the entire loan term.
On the CMBS securities side, long-term super-senior AAA-rated securities continue to trade at under 100 basis points (bp) over swaps, having broken the barrier in the beginning of February for the first time since mid-2015, with the exception of one very high-quality offering last August. The market for long-term super-senior AAA-rated CMBS highly correlates to borrower interest rates for CMBS conduit loans. The two most recent CMBS deals are currently being marketed with long-term super-senior AAA-rated securities at 94-95 bp over swaps, right in the middle of the range for CMBS deals that have priced since February.
Market professionals point to relatively low CMBS supply keeping a check on increases in CMBS spreads. As of the end of April, $18.5 billion of CMBS deals have priced compared with $22.4 billion for the same period in 2016. And 2016 levels were down from $33.6 billion in 2015. The forward pipeline does not indicate a spike in CMBS issuance, so bond buyers have few new CMBS issues in which to invest.
As a result of steady swap and CMBS securities prices, CMBS borrowers are seeing stable interest rates while loans are processed to closing and therefore are closing at rates close to levels indicated in their Term Sheets. Low-leverage CMBS loans are being closed in the 4.5% area and full-leverage loans are being closed in the 5% area. The rate is fixed for the entire loan term.