CMBS 101 ® An Introduction To Commercial Mortgage Backed Securities (CMBS) Prepared by - PowerPoint PPT Presentation

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  1. CMBS 101® An Introduction To Commercial Mortgage Backed Securities (CMBS) Prepared by The Education/Research Committee of the Commercial Mortgage Securities Association CMBS 101®

  2. Joseph Franzetti, Citigroup Global Markets Gale Scott – Standard & Poor’s 2

  3. The CMBS Process

  4. 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

  5. The Participants in a Securitization 5

  6. The Participants in a Securitization 6

  7. 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

  8. 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

  9. 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

  10. Build-A-Bond

  11. 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

  12. Basic CMBS Structure — $100 MM, 10-Year, Fixed Rate NR = Non-Rated 12

  13. 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

  14. 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

  15. Hypothetical Class Structure 15

  16. 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

  17. 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

  18. 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

  19. The CMBS Market

  20. 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

  21. CMBS Issuance: U.S. and Non-U.S.($ Billions) Source: Commercial Mortgage Alert. 21

  22. U.S. CMBS Issuance ($ Billions) Source: Commercial Mortgage Alert US only, non-agency, non-CDO. 22

  23. U.S. CMBS Issuance and Interest Rates Source: Commercial Mortgage Alert and Federal Reserve 23

  24. Multifamily Mortgage Securitization Source: Federal Reserve, Flow of Funds 24

  25. Commercial Mortgage Securitization Source: Federal Reserve, Flow of Funds 25

  26. 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

  27. CMBS Issuance: Shift from RTC to Conduits Source: Commercial Mortgage Alert * RTC: Resolution Trust Company 27

  28. CMBS Spreads Over 10-Year Treasury: Investment Grade Source :Morgan Stanley 28

  29. CMBS Spreads Over 10-Year Treasury: Non-Investment Grade Source: Morgan Stanley 29

  30. CMBS Spreads and Swap Spreads Source: Morgan Stanley 30

  31. 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

  32. 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

  33. Investors of CMBS

  34. 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

  35. Investors of CMBS in 2004 Source: Morgan Stanley 35

  36. 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

  37. Yield Differential(10-Year Sector; Yield over Treasury) Source: Merrill Lynch 37

  38. Maturity of markets Position in Asset Class Past performance is no guarantee of future success Credit Performance Source: FitchRatings 38

  39. 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

  40. Non-Correlated Risks 40

  41. Investing in Non-Correlated Risks 41