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CMBS 101 ® An Introduction To Commercial Mortgage Backed Securities (CMBS) Prepared by The Education/Research Committee of the Commercial Mortgage Securities Association. CMBS 101 ®. Joseph Franzetti, Citigroup Global Markets Gale Scott – Standard & Poor’s . 2. The CMBS Process. Investors.

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Presentation Transcript
slide1

CMBS 101®

An Introduction To Commercial Mortgage Backed Securities (CMBS)

Prepared by

The Education/Research Committee of the Commercial Mortgage Securities Association

CMBS 101®

slide2
Joseph Franzetti, Citigroup Global Markets

Gale Scott – Standard & Poor’s

2

the participants in a securitization

Investors

Trustee/

Fiscal Agent

Investors

Investors

Depositor (SPE)

Issuer/

Investment Banker

LoanOriginator/Loan Seller

Borrowers

Mortgage

Bankers

Primary or Sub Servicer

Financial

Statements

Engineering

Reports

Appraisals

Master

Servicer

Rating

Agency

Rating

Agency

Rating

Agency

Rating

Agency

Special

Servicer

The Participants in a Securitization

6

5

Securities

4

3

3

2

3

1

7

7

7

2 months (Loan Funding) + 2 months (Bond Issuance)

4

the participants after the securitization is completed

Investors

Trustee/

Fiscal Agent

Investors

Investors

Trust

Investment Bank/

Secondary Traders

Borrowers

Rating Agencies

Master Servicer

Primary or Sub-Servicer /Mortgage Banker

Special Servicer

The Participants after the Securitization is Completed

7

where the money goes

Loan Originator /Loan Seller(Lender)

Borrowers

Servicer-

Collection

Account

Trustee-

Distribution

Account

Securities

Investors

Where the Money Goes

Assignments of Rents and Leases

Loan Proceeds

Mortgage

Notes

Securities Sale

Proceeds at Closing

Debt Service

& Escrows

Debt Service

Less Servicer Fee

Plus Advances

Monthly

Bond

Coupon

& Principal

Securities Sale

Proceeds at Closing

8

transaction timetable

Participant

Initial analysis

LO, IB

Due diligence for securitization

LO, IB, SC

Structuring process

LO, IB

B-buyer due diligence

LO, IB, BB

Rating agency review

LO, IB, RA

Selection of servicer & trustee

LO, IB, SV

Legal documentation, both

ALL

private & public securities offering

Pre-marketing of securities

IB, Inv, RA

Marketing / pricing

Private offering:

IB, Inv, BB, RA

Pricing of below-investment grade

Public offering:

IB, Inv, RA

Pricing of investment grade

Closing of securities

ALL

LO

SV

UC

Inv

Loan Originator

Servicer

Underwriter's Counsel

Investor

IB

RA

SC

BB

Investment Bank

Rating Agency

Seller's Counsel

B-Piece Buyer

Transaction Timetable

Activity

9

hypothetical structure credit tranching
Hypothetical Structure: Credit Tranching

Last Loss

Lowest Risk

$85MMInvestment GradeCMBS:Aaa/AAA

$9MMOther Investment Grade:Aa2/AAA2/ABaa2/BBB

$4MMNon-InvestmentGrade CMBS:Ba2/BBB2/B

$2MMNon-Rated CMBS

$100MMPool of Mortgages

Loss Position

Credit Risk

Highest Risk

First Loss

11

senior subordinated structure 10 year security

P + i

P + i

P + i

i

i

i

i

Senior / Subordinated Structure — 10 Year Security

First

9 years

After

9.5 years

After

9.75 years

After

10 years

MortgagePool

A

A

A

A

A

A

P + i

B

B

B

B

i

C

C

C

C

D

D

D

D

i

13

basic cmbs structure
Basic CMBS Structure

Subordination could be calculated as follows for Aaa/AAA level stress:

Foreclosure Frequency X Loss Severity =

30% X 50% = .15 or 15% coverage or subordination

14

how to decide how much subordination loss rate scenarios

Default

19.6%

No Default

80.4%

Liquidated

55%

Restructured

25%

Become Current

20%

Loss Rate

16.5%

Loss Rate

33%

Loss Rate

0%

How To Decide How Much Subordination? Loss Rate Scenarios

Equally Weighted Portfolio Loss Rate =

(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%

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.)

16

basic cmbs structure 100 mm 10 year fixed rate with interest only strip io
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

hypothetical class structure18
Hypothetical Class Structure

IF 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

slide20

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 1990

Source: Federal Reserve, Flow of Funds

20

cmbs issuance u s and non u s billions
CMBS Issuance: U.S. and Non-U.S.($ Billions)

Source: Commercial Mortgage Alert.

21

u s cmbs issuance billions
U.S. CMBS Issuance ($ Billions)

Source: Commercial Mortgage Alert

US only, non-agency, non-CDO.

22

u s cmbs issuance and interest rates
U.S. CMBS Issuance and Interest Rates

Source: Commercial Mortgage Alert and Federal Reserve

23

multifamily mortgage securitization
Multifamily Mortgage Securitization

Source: Federal Reserve, Flow of Funds

24

commercial mortgage securitization
Commercial Mortgage Securitization

Source: Federal Reserve, Flow of Funds

25

single family and commercial multifamily securitization market penetration
Single Family and Commercial/Multifamily Securitization Market Penetration

59.6%

23.7%

Source: Federal Reserve, Flow of Funds

Date through 2004, year 14 (CMBS) and year 34 (Single Family)

26

cmbs issuance shift from rtc to conduits
CMBS Issuance: Shift from RTC to Conduits

Source: Commercial Mortgage Alert

* RTC: Resolution Trust Company

27

cmbs spreads and swap spreads
CMBS Spreads and Swap Spreads

Source: Morgan Stanley

30

market size comparison as of 12 31 04
Market Size Comparison(as of 12/31/04)

REITs Market Cap 1

Microsoft Market Cap (largest in NYSE) 2

GDP of Switzerland (17th largest) 3

Commercial and Multifamily Securitizations 4

Source : (1) NAREIT; (2) Microsoft Website; (3) World Bank; (4) Federal Reserve, Flow of Funds

31

market size comparison as of september 30 2005
Market Size Comparison(as of September 30, 2005)

US Government Securities

All Commercial + Multifamily Mortgages

Single Family Mortgages

Single Family Securities

Corporate Bonds

Source: Federal Reserve, Flow of Funds

32

who buys cmbs
Institutional fixed income securities investors buy public bonds

Real estate high yield investors buy private bonds

Varies by class, by rating, by structure, by underlying collateral

Who Buys CMBS?

34

investors of cmbs in 2004
Investors of CMBS in 2004

Source: Morgan Stanley

35

slide36
Yield differential (relative value investing)

Credit performance

Asset allocation (satisfy allocation to real estate debt)

Non-correlated risks (compare to MBS and corporates)

Comparative Credit Risk

Why?

Remember:

  • Credit Risk ≠ Yield

36

credit performance
Maturity of markets

Position in Asset Class

Past performance is no guarantee of future success

Credit Performance

Source: FitchRatings

38

satisfying asset allocation to real estate debt
Risk based capital treatment for insurance companies gives advantage to CMBS

Mortgages = 3% Risk Based Capital (depending on insurer’s experience)

Investment Grade Public Securities = 0.3% Risk Based Capital

Cost of management (direct loan vs. securities investment)

Liquidity (ease of trading in and out of the portfolio)

Creates diversified investment portfolio

Satisfying Asset Allocation to Real Estate Debt

39