Since March 2020, we’ve posted regular updates on the commercial loan pricing markets, based on what we’ve seen when examining the PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.
In today’s analysis, for the month of October, we look at the clustering around the 3.5% coupon, increased SOFR pricing activity, and the steepening of the fixed-rate funding curve.
If you’d like to see our previous loan pricing market updates, you can find them here.
If you have questions about metrics that have appeared in previous posts, but not this latest one, please reach out to us at firstname.lastname@example.org.
NOTE: PrecisionLender’s data reflects actual commercial opportunities priced (loans, deposits, and other fee-based business) by more than 150 banks in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to their variance in size, these banks are also geographically diverse, with borrowers in all 50 states.
Pricing Volume Consistent in 2H 2021
After spiking up in June, pricing volume has stayed in a narrow, but high, track for the past four months. The monthly average is now 33% higher than January’s volume priced.
Priced Commercial Loan Volume by Month
(Indexed to January 2021 = 100)
Rate Type Mix: SOFR Replaces LIBOR
SOFR pricing volume doubled from September to October. It has increased to the point where we can now report on its contribution to the overall rate type mix. The comparison of the June 2021 mix (the last one before we started registering SOFR activity) and October 2021 shows that SOFR is essentially (and understandably) replacing LIBOR. As LIBOR’s share of the mix has dropped from 25 to 16%, SOFR has shot up from 0% to 8%.
Rate Type Mix
Floating Rate Spreads: SOFR Remains Above LIBOR
As it’s just our third month of tracking SOFR spreads, there’s nothing major to report – only that they’ve been consistently higher than LIBOR spreads thus far. With more banks dipping their toes into the SOFR pricing waters, we would expect the spread to be more elastic than LIBOR, as bankers get accustomed to how to price for the market with this new index.
Weighted Average Spread to 1-Month LIBOR & SOFR
Floating Rate Spreads: Prime Spreads Remain Low
Since dropping down in July, Prime spreads have stayed in a lower track for the past four months. October’s average - .23% is half of its January counterpart. The driving factor, as we’ll show in a bit, appears to be the coupon rate on prime-based loans.
Weighted Average Spread to Prime
Fixed-Rate Funding Costs Rise on Shorter Maturities
October continued the steepening trend in the middle section of the funding curve. That steepening also shifted to earlier maturities. With costs for 12-month maturities jumping up 10 bps and 24-month maturities rising 25 bps since our previous snapshot at the end of September. Previously most of the steepening had been concentrated in the 60-84 month range.
Overall funding costs for loans priced showed LIBOR at 33 basis points and Prime at 44 bps, while fixed-rate loan costs were 141 bps, up 19 bps month-over-month.
3-Month LIBOR Swap Curve, Selected Dates
Static Coupon Rate Hampers Fixed-Rate Spreads
While fixed-rate funding costs continued to rise, the coupon rate on these deals continues to hover around 3.5% a position it’s held since March of 2020. As a result, fixed-rate spreads have dropped continuously in 2021 and are now well below pre-pandemic levels.
Fixed-Rate Coupon Rate vs. Spread
Coupon Trends: Fixed and Prime-Based Rates Converge
As mentioned above, the story behind compressed spreads on Prime-based floating rate loans is the coupon rate. While the Prime index has been at 3.25% for some time, the Prime coupon dropped down around July and is now in the same territory as the fixed-rate coupon – right around the 3.5% mark on a weighted average basis. In October, approximately 60% of the loans priced in PrecisionLender had rates at or around this rate. The proximity shows in the median rates as well: 3.75% prime and 3.78% fixed.
Meanwhile, the aforementioned higher spreads for SOFR – in comparison to LIBOR – are reflected in the higher coupon rates for SOFR-based loans thus far.
Coupon Rate by Month, Rolling Trend
Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send along your questions to email@example.com.