GSP has used the FINFacts forum to report about the impact of recent credit issues on the fixed-rate CMBS market. Floating rate debt is also impacted. The following comments summarize changes observed in floating rate (“bridge”) financing.
Index: The standard index rate for floating rate loans has spiked. Floating rate loans are typically priced over LIBOR (London Interbank Offering Rate), an index at which banks lend to each other. Many banks are now hoarding cash rather than lending, causing the index to rise. After remaining static for several months at 5.32%, 30 Day LIBOR is now 5.82%.
Spreads: Credit spreads for floating rate loans have widened approximately 10 to 50 basis points, but the diverse characteristics of bridge deals makes it difficult to precisely measure the increase. As in fixed rate lending, wider floating rate spreads result from a dearth of buyers for CDO and CMBS paper. Illiquidity reduces supply, and implies a higher cost of capital for all floating rate lenders, including portfolio lenders that benchmark against securitized debt. Those using so called “repo lines” (lines of credit priced over LIBOR from commercial or investment banks) are also passing on higher costs of funds to borrowers.
Underwriting: Tighter underwriting standards have generally reduced bridge loan proceeds by 5% to 10%. Lower proceeds result from the confluence of higher interest rates, conservative operating pro forma assumptions, enhanced scrutiny of debt service coverage ratios, higher exit capitalization rates, and concern over balloon payment risk.
The good news is that a number of lenders are “stepping into the void” to capitalize good transactions. Some of GSP’s lending partners have accumulated substantial cash reserves with a low cost of funds, and now stand ready to lend. Others view the current environment as an opportunity, and have proactively secured “war chest” funds in order to make contrarian investments. GSP has access to attractive capital and can close with confidence.
