CMBS participants foresee relatively flat prices for CMBS securities for the second half of 2018. This would be good news for CMBS borrowers as “re-trading” of CMBS loan spreads to borrowers would remain muted if CMBS prices remain stable. Re-trading occurs when spreads on CMBS securities rise quickly, reducing profit margins on CMBS conduit loans that are in the closing process. When this occurs, lenders increase loan spreads before closing loans in order to maintain a profit margin.
Loan interest rates for 10-year CMBS conduit loans are set by adding the 10-year Swap rate and the loan spread, which is derived from CMBS securities prices, as noted above. The two indexes are added together at loan closing to set the interest rate. So any increases in loan spread negatively impacts the interest rate to the borrower.
CMBS professionals project the spread on benchmark AAA-rated super-senior CMBS securities to be 93 basis points (bp), just 2 bp higher than current levels. A move of 2 bp is not significant and would not trigger any re-trading. The benchmark AAA-rated super-senior CMBS securities spread has been within a range of 86-98 in the five most recent CMBS deals.