CMBS 101 Slides (all sessions) CMSA
Transcript of CMBS 101 Slides (all sessions) CMSA
CMBS 101®
An Introduction To Commercial Mortgage Backed Securities (CMBS)
Prepared by
The Education/Research Committee of the Commercial Mortgage Securities AssociationC
MB
S 10
1®C
MB
S 10
1®
Joseph Franzetti, Citigroup Global Markets
Gale Scott – Standard & Poor’s
2
The CMBS Process
The Participants in a Securitization
Securities
2 months (Loan Funding) + 2 months (Bond Issuance)
5
77
7
6
4
1 23
33
FinancialStatements Appraisals
EngineeringReports
Master Servicer
Rat
ing
Age
ncy
Rat
ing
Age
ncy
Rat
ing
Age
ncy
Rat
ing
Age
ncy
Special Servicer
Primary or Sub Servicer
Trustee/Fiscal Agent
Investors
Depositor (SPE)Issuer/
Investment BankerBorrowers
MortgageBankers
LoanOriginator/Loan Seller
Investors
Investors
4
The Participants in a Securitization
1 Borrower: Owns the property, has repayment and performance obligations
2 Mortgage Banker: Intermediary between borrower and loan originators/loan sellers
3 Loan 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 depositor
4 Depositor: An entity set up by the investment bank sponsoring the securitization purchases commercial mortgage loans and immediately sells loans to a trust.
4 Investment Banker: Overall responsibility for structuring the securitization, selling the bonds/certificates to investors, helps maintain a liquid secondary market for trading the bonds/certificates.
4 Issuer: The trust is the record owner of the commercial mortgage loans, formed by the depositor pursuant to a pooling and servicing agreement (“PSA”).
5 Trustee: Responsible for administering the trust on behalf of and making payments to the investors.
6 Investors: Different investors with varying risk appetites purchase certificates rated from AAA/Aaa to B/B to and unrated certificates.
5
The Participants in a Securitization
7 Master Servicer: Responsible for servicing all mortgage loans owned by the trust.
7 Primary 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.
8 Rating Agencies: Assigns risk of loss ratings on certain bonds/certificates issued for a securitization transaction, monitors performance after securitization funds.
6
The Participants after the Securitization is Completed
Borrowers
Trustee/Fiscal Agent
TrustInvestment Bank/Secondary Traders
Investors
Investors
Investors
Master Servicer
Primary or Sub-Servicer /Mortgage Banker
Special Servicer
Rating Agencies
7
Where the Money Goes
Loan Originator /Loan Seller
(Lender)
Trustee- Distribution
Account
Servicer-CollectionAccount
Securities
Investors
Borrowers
Assignments of Rents and Leases
Loan Proceeds
Debt Service& Escrows
Debt ServiceLess Servicer FeePlus Advances
MortgageNotes
Monthly Bond
Coupon& Principal
Securities SaleProceeds at Closing
Securities SaleProceeds at Closing
8
Transaction Timetable
Initial analysis
Due diligence for securitization
Structuring process
B-buyer due diligence
Rating agency review
Selection of servicer & trustee
Legal documentation, both private & public securities offering
Pre-marketing of securities
Marketing / pricing Private offering: Pricing of below-investment grade Public offering: Pricing of investment grade
Closing of securities
LO Loan Originator SV Servicer UC Underwriter's Counsel Inv InvestorIB Investment Bank RA Rating Agency SC Seller's Counsel BB B-Piece Buyer
Activity
LO, IB
LO, IB, SC
LO, IB
LO, IB, BB
LO, IB, RA
LO, IB, SV
IB, Inv, RA
ALL
IB, Inv, RA
IB, Inv, BB, RA
ALL
Participant1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
9
Build-A-Bond
Hypothetical Structure: Credit Tranching
Last Loss
First Loss
Lowest Risk
Highest Risk
Loss Position
Credit R
isk
$100MMPool of Mortgages
$85MMInvestment Grade
CMBS:Aaa/AAA
$9MMOther Investment Grade:
Aa2/AAA2/A
Baa2/BBB
$4MMNon-Investment
Grade CMBS:Ba2/BB
B2/B
$2MMNon-Rated CMBS
11
Basic CMBS Structure — $100 MM, 10-Year, Fixed Rate
Class Size Rating Coupon Expected Life Subordination
Class A $85 MM Aaa / AAA 5.25% 9 years 15%
Class B $9 MMAa2/AA
A2/ABaa2/BBB
5.50% 9.5 years 6%
Class C $4 MM Ba2/BBB2/B 7.50% 9.75 years 2%
Class D $2 MM NR — 10 years —
NR = Non-Rated
12
B
Senior / Subordinated Structure — 10 Year Security
A
First9 years
After9.5 years
AA
B
C
P + i
i
i
B
C
B
C
P + i
i
After9.75 years
MortgagePool
D D D
After10 years
C
AA
D
A
ii
P + i
i P + i
13
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
Class Rating Size Subordination Coupon
A Aaa/AAA $85MM 15% 5.25%
BAa2/AA
A2/ABaa2/BBB
$9MM 6% 5.50%
C Ba2/BBB2/B
$4MM 2% 7.50%
D NR $2MM 0 ---
14
Hypothetical Class Structure
Rating SizeLoss Coverage/ Subordination
Loss Frequency Loss Severity
Aaa/AAA $85MM 15% = 30% X 50%
Aa2/AA $3MM 12% = 30% X 40%
A2/A $3MM 9% = 30% X 30%
Baa2/BBB $3MM 6% = 20% X 30%
Ba2/BB $2MM 4% = 20% X 20%
B2/B $2MM 2% = 10% X 20%
NR $2MM — — —
15
Equally Weighted Portfolio Loss Rate =
How To Decide How Much Subordination? Loss Rate Scenarios
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.)
Default19.6%
No Default80.4%
Restructured25%
Liquidated55%
Loss Rate33%
Loss Rate16.5%
Become Current20%
Loss Rate0%
(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
Basic CMBS Structure$100 MM, 10-Year, Fixed Rate with Interest Only Strip (IO)
Class Size Rating Coupon Average Life Subordination
Class A-1 $85 MM Aaa / AAA 5.00% 9 years 15%
Class A-X Notional1 Aaa / AAA 0.25% Not Meaningful1
Class B $9 MMAa2/AA
A2/ABaa2/BBB
5.50% 9.5 years 6%
Class C $4 MM Ba2/BBB2/B 7.50% 9.75 years 2%
Class D $2 MM NR — 10 years 0%
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
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%
Hypothetical Class Structure
Class Size Rating Coupon (“C”)Spread At Issue
(Yield, or “Y”) Average Life
A-1 15% Aaa/AAA 5.25% PR 70 bp 5 years
A-2 70% Aaa/AAA 5.30% PR 75 10 years
B 3% Aa2/AA 5.45% PR 90 10 years
C 3% A2/A 5.55% PR 100 10 years
D 3% Baa2/BBB 6.00% PAR 150 10 years
E 2% Ba2/BB 6.50% D 300 10 years
F 2% B2/B 6.50% D 700 10 years
G 2% NR 6.50% D 1200 10 years
18
The CMBS Market
20
Holders of Commercial & Multifamily Mortgage Loans$626 billion of the $2.5 trillion U.S. commercial and multifamily mortgage loans
outstanding are held as securities, a significant increase since 1990
2005 3Q
Life Insurance Cos. 10%
Savings Institutions
8%
Government Sponsored Enterprises
3%
Others 11%
Commercial Banks 43%
CMBS Issuers 25%
Source: Federal Reserve, Flow of Funds
1990
Life Insurance Cos. 22%
Savings Institutions
18%Government Sponsored Enterprises
2%
Others 18%
Commercial Banks 36%
CMBS Issuers 4%
21
CMBS Issuance: U.S. and Non-U.S.($ Billions)
Source: Commercial Mortgage Alert.
3 8 14 17 17 16 26 37
7457 49
7452
7893
169
1 10 0.3 3 1
14
19
12
23
29
21
34
69
0
50
100
150
200
250
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Domestic Non-US
22
U.S. CMBS Issuance ($ Billions)
Source: Commercial Mortgage Alert
US only, non-agency, non-CDO.
3.47.6
14.0 17.2 17.4 15.7
26.4
36.8
74.3
56.648.7
74.4
52.1
77.8
93.1
169.2
0
20
40
60
80
100
120
140
160
180
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
23
U.S. CMBS Issuance and Interest Rates
Source: Commercial Mortgage Alert and Federal Reserve
0
10
20
30
40
50
60
70
90 1
Q
90 3
Q
91 1
Q
91 3
Q
92 1
Q
92 3
Q
92 1
Q
93 3
Q
94 1
Q
94 3
Q
95 1
Q
95 3
Q
96 1
Q
96 3
Q
97 1
Q
97 3
Q
98 1
Q
98 3
Q
99 1
Q
99 3
Q
00 1
Q
00 3
Q
01 1
Q
01 3
Q
02 1
Q
02 3
Q
03 1
Q
03 3
Q
04 Q
1
04 Q
3
05 Q
1
05 Q
3
Issu
ance
($
billi
ons)
3
4
5
6
7
8
9
10-y
ear
Tre
asur
y (%
)
US CMBS Issuance 10-Yr Treasury
24
Multifamily Mortgage Securitization
Source: Federal Reserve, Flow of Funds
0
100
200
300
400
500
600
700
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 053Q
$ B
illio
ns
0%
5%
10%
15%
20%
25%
30%
35%
40%
Sh
are
of
tota
l sec
uri
tize
d
Multifamily Mortgages Outstanding Securitized Share of Total Securitized
25
Commercial Mortgage Securitization
Source: Federal Reserve, Flow of Funds
0
200
400
600
800
1000
1200
1400
1600
1800
2000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 053Q
$ B
illio
ns
0%
5%
10%
15%
20%
25%
Sh
are
of
tota
l sec
uri
tize
d
Commercial Mortgages Outstanding Securitized Share of Total Securitized
26
Single Family and Commercial/Multifamily Securitization Market Penetration
Source: Federal Reserve, Flow of Funds
Date through 2004, year 14 (CMBS) and year 34 (Single Family)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Sh
are
of
ou
tsta
nd
ing
s
Commercial/Multifamily (year 1=1991) Single Family (year 1=1971)
23.7%
59.6%
27
CMBS Issuance: Shift from RTC to Conduits
Source: Commercial Mortgage Alert
* RTC: Resolution Trust Company
0
10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997 1998
$ B
illi
on
s
RTC* Conduit Issuers Other Issuers
28
CMBS Spreads Over 10-Year Treasury: Investment Grade
Source :Morgan Stanley
0
50
100
150
200
250
300
350
0
50
100
150
200
250
300
350
Aaa/AAA Aa2/AA A2/A Baa2/BBB
29
CMBS Spreads Over 10-Year Treasury: Non-Investment Grade
Source: Morgan Stanley
0
100
200
300
400
500
600
700
800
900
1000
1100
0
100
200
300
400
500
600
700
800
900
1000
1100
Ba2/BB B2/B
30
CMBS Spreads and Swap Spreads
Source: Morgan Stanley
0
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
160
180
200
Gap CMBS Aaa Spreads (10-year) Swap Spread Average Gap of Period
31
Market Size Comparison(as of 12/31/04)
Source : (1) NAREIT; (2) Microsoft Website; (3) World Bank; (4) Federal Reserve, Flow of Funds
$290$264
$359
$548
0
100
200
300
400
500
600
$ B
illio
ns
REITs Market Cap 1 Microsoft Market Cap (largest in NYSE) 2
GDP of Switzerland (17th largest) 3
Commercial and Multifamily
Securitizations 4
32
Market Size Comparison(as of September 30, 2005)
$2.5$3.0
$4.6$5.2
$8.8
0
1
2
3
4
5
6
7
8
9
10
$ Tr
illio
ns
0
1
2
3
4
5
6
7
8
9
10
Current CMBS Outstandings
All Commercial + Multifamily Mortgages
Source: Federal Reserve, Flow of Funds
Corporate Bonds US Government Securities
Single Family Securities
Single Family Mortgages
Investors of CMBS
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
34
35
Investors of CMBS in 2004
Source: Morgan Stanley
Insurance Companies 24%
Banks25%
Government Sponsored Entities
9%
Investment Advisors/Money Managers
28%
Opportunity Funds Finance Companies
Pension Funds 14%
Why?
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
Remember: Credit Risk ≠ Yield
36
37
Yield Differential(10-Year Sector; Yield over Treasury)
Source: Merrill Lynch
88
42
62
7778
36
56
65
0
10
20
30
40
50
60
70
80
90
100
Aaa CMBS Agencies Aaa Credit Card ABS Single-A Industrials
Ba
sis
po
ints
ov
er
Tre
as
ury
Recent (as of 12/09/05) 6-Month Average
Corporate vs. CMBS Bond Defaults: 1990–2003 (%) –––––– 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%
Source: FitchRatings
Credit Performance
Maturity of marketsPosition in Asset ClassPast performance is no guarantee of future success
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
39
Non-Correlated Risks
CMBS MBS Corporates
PRIMARY RISK Real estate credit risk Prepayment risk Corporate credit risk
MATURITY Some extension risk No extension risk No extension risk
DEFAULT DSCR is a predictor of default risk
LTV is a predictor of default risk Corporate credit risk a better predictor of default risk
LIQUIDITY Growing but smaller overall market than MBS and corporates
Highly liquid market Highly liquid market
INFORMATION Different for public buyers versus private buyers
Widely disseminated Widely disseminated
40
Investing in Non-Correlated Risks
CMBS MBS Corporates
RATING AGENCIES 10 years of experience 30 years of experience 100 years of experience
SECURITY Set pools of assets; first priority mortgage liens
Set pools of uniform assets; first priority mortgage liens
Unsecured; investors exposed to future decisions at the corporation
PERFORMANCE Should outperform MBS and corporates in falling rate environment
More interest rate sensitive Interest rate sensitive
RATINGS Volume of AAA and Non-Investment Grade
Almost all AAA and AA Mostly A, BBB
41