Introduction to CMBS (CMBS 101™) Presenters: Rodney Pelletier, Fitch Ratings Vida Tayebi, Fitch Ratings Romano Paredes, Morgan Stanley CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Overview → What are CMBS? → CMBS Process & Players → Typical → Rating CMBS Deal Structure CMBS Transactions → Different → CMBS Types of CMBS Deals Market Overview – Sub-prime Impact – 2008 CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER What are CMBS? → CMBS are bonds sold through the capital markets, whose payments are backed by commercial mortgage loans → CMBS are a segment of the structured finance markets (other segments include RMBS, ABS, ABCP, CDO, etc.) → CMBS are typically rated by one or more credit rating agencies CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER CMBS Securitisation Process Origination & Aggregation Origination and Primary Underwriting Functions Structuring & Rating Closing of Mortgages Independent Rating Issuance & Secondary Market Aaa/AAA TRADING Aa/AA A/A Borrowers Multiple Mortgages Pool Information Structuring Baa/BBB Distribution Securities INVESTORS Ba/BB B/B NR CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER TRUSTEE MASTER SERVICER SPECIAL SERVICER CMBS Process & Players 1. Lender originates a (number of) commercial mortgage loan(s) to Borrower(s) 2. Borrower provides mortgage security to Lender 3. Arranger (investment bank) structures transaction and selects loan pool for CMBS issuance 4. Rating agencies provide and maintain rating on CMBS notes 5. CMBS issuer sells notes to Investors 6. Issuer uses notes proceeds to purchase loan (pool) from originator 7. Servicer collects principal & interest (“P&I”) on the loan pool and pays P&I on the notes and provides reports to Investors 8. Security trustee enforces security in case of defaults CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Typical CMBS Deal Structure CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Typical CMBS Deal Structure External Supports • Liquidity facility • Funded reserves • Issuer level interest rate/base rate/currency swaps • Excess spread trapping Rent Tenants Security Package and P&I on Loan External Supports Mortgage Collateral Lender/ Originator Owner/ Borrower Loan Amount Loan Security Package • Registered Mortgage • Rent Assignment • Account Assignment • Borrower Level Swap • Share Pledge on Owner/Borrower SPV CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Security Package and P&I on Notes Issuer Issuance Proceeds Investors Issuance Proceeds Notes Security Package • Assignment of Loan Security • Funded Reserves • Issuer Level Swaps Typical CMBS Notes Structure EUR 92MM Investment Grade CMBS AAA/Aaa AA/Aa2 A/A2 BBB/Baa2 EUR 4 MM Unrated CMBS CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER First Loss Lowest Risk Credit Risk EUR 4MM Non-Investment Grade CMBS Ba2/BB Loss Position EUR 100MM Pool of Mortgages Last Loss Highest Risk Sequential Pay Down Structure P+i A A A B i B P+i B i C i C CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER P+i C 100% Pro Rata Pay Down Structure Subject to triggers reverting to sequential pay down structure P+i A P+i A P+i A P+i B P+i B P+i B P+i C P+i C P+i C CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Modified Pro Rata Pay Down Structure Subject to triggers reverting to sequential pay down structure A P+i P+i B P+i B P+i P+i C P+i C P+i P+i CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER A A B C Priority of Payment (PoP) or Waterfall → Pre-Enforcement → Separate → Straight vs Post-Enforcement waterfalls for P&I sequential or pro rata → Modified sequential or modified pro rata → Sales proceeds in liquidating pools with allocated loan amount pro rata and release premium sequential → Significant impact on the tranching of the notes CMSA-EUROPE CONFERENCE 2008 LONDON, 4-5 NOVEMBER Typical Security Package for Notes → Assignment of Show More
