Premiums & Rates: The Spread of Risks or the Risks to the Spread?
After a thoroughly pleasant five month declining trend, debenture rates ticked up in the May auction of last week. This is not surprising given the steady upward trend in the ten year treasury, a benchmark to which the 504 20 year debenture loosely correlates. The saving grace to this situation, from a borrower’s perspective, has been the continued downtrend in the spread of the debenture rate to the ten year treasury. Since hitting a high of 3.49% in December of 2009, the spread has declined to 1.25% in the May auction. The “spread”, is the premium paid to debenture holder for the perceived risk above holding a treasury debt issue. While the principal and interest are guaranteed to the debenture holder, the holder assumes risk in the form of payment interruption or repurchase, which leads to rate risk as funds must then be reinvested at uncertain rates.
But, the spread may be ripe for adjustment...or to phrase it differently: are investors being compensated for their risks? Moving CMBS product, of whatever stripe, in the present environment is no small task, which argues for a larger spread. (Hats off to the DCFC, Steve Van Order and the underwriters!) However, in the medium term, increasing defaults and repurchases may be the factor that drives an expansion of the spread, as investors re-evaluate the risk in the 504 debenture portfolio.
The lender’s challenge is help a borrower identify and plan for these risks. Perhaps having a partner who could explain their half of the equation might be useful? Please visit our website, www.idscorp.org and see how the LATS software and our Network of local CDC partner licenses can bring predictability and accountability to the 504 lending process.
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