Question about CMBS/Conduit break even rates?
How would you calculate the CMBS/Conduit break even rate/spread over swaps? Commercial lenders know the break even rate and price accordingly, but how do they calculate this rate?

I know they look at Trepp and the initial pricing info listed in CMA, but I don't understand how this info can translate into calculating the break even rates used by commercial lenders.

For example, Trepp has says the following about new issue pricing:

"The CMBS market certainly got caught up in the maelstrom on Monday. Shedding its steady-Eddie image, spreads gapped noticeably wider during the day. After ending last week in the S+95-96 area, new issue 10-year paper was being quoted anywhere from S+97 to S+101. As for new issue BBB paper, after closing last week in the S+380 to S+400 range, new BBB bonds were being quoted 20 to 30 back around mid-afternoon on Monday. To be fair, dealer runs were still reflecting only modest widening and a lot of that color came from conversations"

Using this info, how would you calculate the break even spread over swaps for a 10 year loan. For example, if a lender is going to give a normal 10 year 75% LTV loan, how would he use this info to calculate the overall mortgage rate (10-yr swap rate + spread) he needs to be above to make a profit.

Thank you in advance, I really appreciate it if you could clear this up for me.



In CMA, I'm not sure exactly what info to look at in CMA (coupon/dollar price/yield/avg life/spread), but it varies for each bond class. Trepp is
[{"id": "ct52dal", "text": "I've been trying to figure this one out too man. Can someone at least point me in the right direction of where I can find out? Or give any partial info?", "replies": [], "depth": 1}, {"id": "ct74pqb", "text": "I think you're confusing the bonds versus the loans. The spreads on the paper are something entirely different than the spreads that will be quoted on a single loan. I'm pretty sure many CMBS lenders quote before knowing what the pool looks like. And you need to know what the pool looks like in order to determine the WAL and WAC, which you would use to price the bonds.\n\nOne can calculate the estimated prices of the bonds at prevailing spreads, and hence the proceeds, once they know what the pool looks like, but to do it before hand, beyond general estimation based on prior pools, don't think you can calculate an exact breakeven rate. \n\nAlso, these lenders are competing with life companies and commercial banks, who don't resecuritize the loans, so the competition on rates is determined by market forces that I think transcend the spread on CMBS investment grade paper. \n\nMaybe I'm talking out of my ass, as I'm not a trader nor a i-bank structurer, but that's my understanding.", "replies": [], "depth": 1}, {"id": "ctiye9e", "text": "On CMBS loans, the banks make their profit immediately when the loans are sold to the securitization, so the loans are only on the books (for the most part) for 1-6 months. Based on how current issues are trading, the banks can estimate their profit on new loans based on today's spot and where the curve indicates the spot will be at securitization. The profit is calculated on a per-loan basis depending on its rate and the overall rate structure of the securitization.  \n\nWhen I was doing originations before the crash in 2007, there was a genius on the trading desk who did all the calculations and then had to make the judgment call on timing and rates down the pipeline. They gave us the basic spreads at first weekly, then daily, and when the shit hit the fan they started re-trading deals that had been signed up. Then the market stopped...", "replies": [], "depth": 1}, {"id": "cw3ivqn", "text": "Hi there,\nThere are many factors that go into a CMBS breakeven model including current interest rates, but the two main factors are credit enhancement levels and spreads.  Of the two, spreads are easier to nail down since market participants know the spreads at which the last deal priced.\nCredit enhancement, is much harder to know since we are talking about quoting loans to breakevens, which is before the actual credit enhancements are given by the rating agencies when the deals are finalized.  The factors that go into credit enhancement levels are, relative quality of cash flows, leverage of each loan, stressed DSCR, geography, property type, amortization, sponsorship, tenant quality, reserves, etc etc..\nAnd there are like 6 rating agencies with different criteria who handle information differently.  So when you quote breakevens, good luck to you.  \n", "replies": [], "depth": 1}]