CMBS 101 Slides (All Sessions)
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Transcript of CMBS 101 Slides (All Sessions)
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CMBS 101An Introduction To Commercial Mortgage Backed Securities (CMBS)
Prepared by
The Education/Research Committee of the Commercial Mortgage Securities AssociationCMBS 101
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Joseph Franzetti, Citigroup Global MarketsGale Scott Standard & Poors 2
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The CMBS Process
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The Participants in a SecuritizationSecurities2 months (Loan Funding) + 2 months (Bond Issuance)577764123334
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The Participants in a Securitization5
1Borrower:Owns the property, has repayment and performance obligations2Mortgage Banker:Intermediary between borrower and loan originators/loan sellers3Loan Originators/Loan Sellers:Lends money to the borrower, secured by a first priority lien, enters into a mortgage loan purchase agreement (MLPA) to sell the loan to the securitization depositor4Depositor:An entity set up by the investment bank sponsoring the securitization purchases commercial mortgage loans and immediately sells loans to a trust. 4Investment Banker:Overall responsibility for structuring the securitization, selling the bonds/certificates to investors, helps maintain a liquid secondary market for trading the bonds/certificates.4Issuer:The trust is the record owner of the commercial mortgage loans, formed by the depositor pursuant to a pooling and servicing agreement (PSA).5Trustee:Responsible for administering the trust on behalf of and making payments to the investors. 6Investors:Different investors with varying risk appetites purchase certificates rated from AAA/Aaa to B/B to and unrated certificates.
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The Participants in a Securitization6
7Master Servicer:Responsible for servicing all mortgage loans owned by the trust. 7Primary or Sub Servicer:May be the originating mortgage bankers, often the initial point of contact for the borrower. 7 Special Servicer:Named at the issuance of the CMBS to be responsible for servicing any mortgage loans that may default in the future.8Rating Agencies:Assigns risk of loss ratings on certain bonds/certificates issued for a securitization transaction, monitors performance after securitization funds.
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The Participants after the Securitization is Completed
7
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Where the Money GoesAssignments of Rents and LeasesLoan ProceedsDebt Service& EscrowsDebt ServiceLess Servicer FeePlus AdvancesMortgageNotesMonthly BondCoupon& PrincipalSecurities SaleProceeds at ClosingSecurities SaleProceeds at Closing8
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Transaction TimetableActivity9
12345678910111213141516
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Build-A-Bond
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Hypothetical Structure: Credit TranchingLast LossFirst LossLowest RiskHighest RiskLoss PositionCredit Risk$100MMPool of Mortgages$85MMInvestment GradeCMBS:Aaa/AAA
$9MMOther Investment Grade:Aa2/AAA2/ABaa2/BBB
$4MMNon-InvestmentGrade CMBS:Ba2/BBB2/B
$2MMNon-Rated CMBS11
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Basic CMBS Structure $100 MM, 10-Year, Fixed RateNR = Non-Rated12
ClassSizeRatingCouponExpected LifeSubordinationClass A$85 MMAaa / AAA5.25%9 years15%
Class B$9 MMAa2/AAA2/ABaa2/BBB5.50%9.5 years6%Class C$4 MMBa2/BBB2/B7.50%9.75 years2%Class D$2 MMNR10 years
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Senior / Subordinated Structure 10 Year Security
B
AFirst9 yearsAfter9.5 years
A
ABCP + iiBC
BCAfter9.75 yearsMortgagePoolDDDAfter10 years
CA
AD
A i13
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Basic CMBS Structure Subordination could be calculated as follows for Aaa/AAA level stress:
Foreclosure FrequencyXLoss Severity=30%X 50%= .15 or 15% coverage or subordination14
ClassRatingSizeSubordinationCouponAAaa/AAA$85MM15%5.25% BAa2/AAA2/ABaa2/BBB $9MM 6% 5.50%CBa2/BBB2/B$4MM2%7.50% DNR$2MM0---
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Hypothetical Class Structure15
RatingSizeLoss Coverage/ SubordinationLoss FrequencyLoss SeverityAaa/AAA$85MM15%=30%X50%Aa2/AA$3MM12%=30%X40%A2/A$3MM9%=30%X30%Baa2/BBB$3MM6%=20%X30%Ba2/BB$2MM4%=20%X20%B2/B$2MM2%=10%X20%NR$2MM
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How To Decide How Much Subordination? Loss Rate Scenarios
Equally Weighted Portfolio Loss Rate =
Source: Morgan Stanley. Update: Commercial Mortgage Defaults: 30 Years of History. September 2004 (Cumulative loss rates for about 18,000 commercial mortgages originated by eight life insurance companies between 1972 and 2002.)(0.196)(0.55)(0.33) + 0.0356 +
(0.196)(0.25)(.0165) + 0.008 +
(0.196)(0.20)(0) 0 =.0436 or 4.36%16
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Basic CMBS Structure$100 MM, 10-Year, Fixed Rate with Interest Only Strip (IO)1 For illustration purposes, the INTEREST ONLY (IO) strip collects interest of 0.25%, or 25 bp on a NOTIONAL amount of $85MM. The notional amount could be the same as the size of an associated class or the size of the entire security. Here, the interest on Classes A-1 and A-X total the coupon of Class A alone in the earlier example. 17
ClassSizeRatingCouponAverage LifeSubordinationClass A-1$85 MMAaa / AAA5.00%9 years15%Class A-XNotional1Aaa / AAA0.25%Not Meaningful1Class B$9 MMAa2/AAA2/ABaa2/BBB5.50%9.5 years6%Class C$4 MMBa2/BBB2/B7.50%9.75 years2%Class D$2 MMNR10 years0%
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Hypothetical Class StructureIF Y < C, then it is a premium bond (PR)IF Y = C, then it is a par bond (PAR)IF Y > C, then it is a discount bond (D)Assumptions: 5-year Treasury = 4.4% 10-year Treasury = 4.5%18
ClassSizeRatingCoupon (C)Spread At Issue (Yield, or Y)Average LifeA-115%Aaa/AAA5.25% PR70 bp5 yearsA-270%Aaa/AAA5.30% PR7510 yearsB3%Aa2/AA5.45% PR9010 yearsC3%A2/A5.55% PR10010 yearsD3%Baa2/BBB6.00% PAR15010 yearsE2%Ba2/BB6.50% D30010 yearsF2%B2/B6.50% D70010 yearsG2%NR6.50% D120010 years
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The CMBS Market
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Holders of Commercial & Multifamily Mortgage Loans$626 billion of the $2.5 trillion U.S. commercial and multifamily mortgage loans outstanding are held as securities, a significant increase since 199020Source: Federal Reserve, Flow of Funds
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CMBS Issuance: U.S. and Non-U.S.($ Billions)21Source: Commercial Mortgage Alert.
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U.S. CMBS Issuance ($ Billions)22Source: Commercial Mortgage AlertUS only, non-agency, non-CDO.
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U.S. CMBS Issuance and Interest Rates 23Source: Commercial Mortgage Alert and Federal Reserve
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Multifamily Mortgage Securitization24Source: Federal Reserve, Flow of Funds
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Commercial Mortgage Securitization25Source: Federal Reserve, Flow of Funds
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Single Family and Commercial/Multifamily Securitization Market Penetration26Source: Federal Reserve, Flow of FundsDate through 2004, year 14 (CMBS) and year 34 (Single Family)23.7%59.6%
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CMBS Issuance: Shift from RTC to Conduits27Source: Commercial Mortgage Alert* RTC: Resolution Trust Company
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CMBS Spreads Over 10-Year Treasury: Investment Grade28Source :Morgan Stanley
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CMBS Spreads Over 10-Year Treasury: Non-Investment Grade29Source: Morgan Stanley
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CMBS Spreads and Swap Spreads30Source: Morgan Stanley
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Market Size Comparison(as of 12/31/04)31Source : (1) NAREIT; (2) Microsoft Website; (3) World Bank; (4) Federal Reserve, Flow of FundsREITs Market Cap 1Microsoft Market Cap (largest in NYSE) 2GDP of Switzerland (17th largest) 3Commercial and Multifamily Securitizations 4
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Market Size Comparison(as of September 30, 2005)32All Commercial + Multifamily MortgagesSource: Federal Reserve, Flow of FundsCorporate Bonds US Government Securities Single Family Securities Single Family Mortgages
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Investors of CMBS
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Who Buys CMBS?Institutional fixed income securities investors buy public bondsReal estate high yield investors buy private bondsVaries by class, by rating, by structure, by underlying collateral
34
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Investors of CMBS in 200435Source: Morgan Stanley
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Why?Yield differential (relative value investing)Credit performanceAsset allocation (satisfy allocation to real estate debt)Non-correlated risks (compare to MBS and corporates)Comparative Credit Risk
Remember:Credit Risk Yield
36
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Yield Differential(10-Year Sector; Yield over Treasury)37Source: Merrill Lynch
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Credit PerformanceMaturity of marketsPosition in Asset ClassPast performance is no guarantee of future success
Source: FitchRatings38
Corporate vs. CMBS Bond Defaults: 19902003 (%)
Cumulative Defaults
Corporate
CMBS
Investment Grade
2.10 %
0.10%
Below Investment Grade
55.00%
1.61%
All Bonds
11.00%
0.19%
Average Annual Defaults
Corporate
CMBS
Investment Grade
0.15%
0.01%
Below Investment Grade
3.94%
0.12%
All Bonds
0.78%
0.01%
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Satisfying Asset Allocation to Real Estate DebtRisk based capital treatment for insurance companies gives advantage to CMBSMortgages = 3% Risk Based Capital (depending on insurers experience)Investment Grade Public Securities = 0.3% Risk Based CapitalCost of management (direct loan vs. securities investment)Liquidity (ease of trading in and out of the portfolio)Creates diversified investment portfolio
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Non-Correlated Risks40
CMBSMBSCorporatesPRIMARY RISKReal estate credit riskPrepayment riskCorporate credit riskMATURITYSome extension riskNo extension riskNo extension riskDEFAULTDSCR is a predictor of default riskLTV is a predictor of default riskCorporate credit risk a better predictor of default riskLIQUIDITYGrowing but smaller overall market than MBS and corporatesHighly liquid marketHighly liquid marketINFORMATIONDifferent for public buyers versus private buyersWidely disseminatedWidely disseminated
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Investing in Non-Correlated Risks41
CMBSMBSCorporatesRATING AGENCIES10 years of experience30 years of experience100 years of experienceSECURITYSet pools of assets; first priority mortgage liensSet pools of uniform assets; first priority mortgage liensUnsecured; investors exposed to future decisions at the corporationPERFORMANCEShould outperform MBS and corporates in falling rate environmentMore interest rate sensitiveInterest rate sensitiveRATINGSVolume of AAA and Non-Investment GradeAlmost all AAA and AAMostly A, BBB