Presentation is loading. Please wait.

Presentation is loading. Please wait.

The Evolution of the CMBS Market CRE Annual Convention – Maui, HI October 23-26, 2006.

Similar presentations

Presentation on theme: "The Evolution of the CMBS Market CRE Annual Convention – Maui, HI October 23-26, 2006."— Presentation transcript:

1 The Evolution of the CMBS Market CRE Annual Convention – Maui, HI October 23-26, 2006

2 2 I. Historical Overview

3 3 Historical Overview - CMBS First recorded CMBS transaction – 1985 CMBS prominence grew following RTC transactions in the early 1990s S&L crisis in early ’90s RTC formed to liquidate assets Liquidity shortage – Wall Street steps in to pool performing and non-performing loans In 1995, total CRE loans outstanding was $1.014T and CMBS represented 5.4%. In 2005, total CRE loans outstanding was $2.618T and CMBS represented 19.9%. CMBS represented 37% of all CRE loans originated in 2005 ($460B). Types of transactions – conduit, fusion, single borrower / asset, floating rate, agency. Conduit and fusion made up approximately 72.7% of all CMBS transactions in the US in 2005. Source: Commercial Mortgage Alert, Wachovia Securities and Mortgage Bankers Association

4 4 Historical Overview - CMBS Source: Commercial Mortgage Alert

5 5 Historical Overview - CMBS Investors – B-piece buyers and Investment grade B-piece buyer – CRE savvy – first loss position Investment grade – Institutional investors, insurance companies, money managers, pension funds, banks Typically, European investors are more focused on floating rate transactions / bond classes and US investors purchase more fixed rate product –Short duration – match assets to funding sources –Utilize currency hedges and would rather not put on interest rate swaps in addition to currency hedges Delinquency performance over the last 10 years has been strong with a current delinquency rate across all CMBS deals of 0.51%. Reasons for low delinquencies despite higher IR and market fundamentals being weaker Strong capital flows Borrowers willingness to accept lower cap rates

6 6 Historical Overview - CMBS Source: Lehman Brothers – Lehman Live

7 7 Historical Overview - CMBS Source: Lehman Brothers – Lehman Live

8 8 Historical Overview - CDO Re-REMICs and CDOs have been utilized for the past 10+ years on corporate bonds. CRE Re-REMICs were first utilized in the mid 1990s The first CRE CDO was in 2001. Since 2001, CRE CDO and other CDO products (synthetics) have exploded with popularity and have heavily impacted credit in the CRE origination market. Re-REMIC v CDO Re-REMIC: tax efficient structure, REMIC bonds only, static structure, US issuer only, very inflexible CDO: all types of collateral permitted, off shore issuer, static or managed pool, ramp allowed, reinvestment allowed, call options allowed, very flexible

9 9 Historical Overview - CDO Source: Commercial Mortgage Alert

10 10 II. CMBS Process

11 11 CMBS Process CMBS loan versus a portfolio loan Pricing versus flexibility Overview of CMBS Process Originate commercial mortgage loans on properties – typically non-recourse lending Accumulate a pool of loans Present pool to rating agencies to obtain bond structure Present pool to B-piece investors for bid and select B-piece investor for due diligence Finalize pool with B-piece investor and rating agencies and circulate prospectus to investors Sell investment grade bonds Contributors include commercial banks, investment banks, insurance companies, finance companies

12 12 CMBS Process Contributors team up to: Grow the size of the deal Enhance market liquidity Serve as market benchmarks Increase turn over velocity to increase ROE. Prepayment risk reduced with YM and defeasance. Benefits to Issuer Move loans off balance sheet and free up capital Increase ROE by selling loans on a regular basis Provide another loan product to meet clients needs

13 13 CMBS Process Challenges in today’s market Lack of amortization Lack of structuring Increased leverage Return of esoteric property types Increased loans in tertiary markets Single tenant loans Increased hospitality concentrations TICS and DST borrower structures Cap rate and interest rate disconnect “Believe in the upside story”

14 14 III. CDO Process

15 15 CDO Process Overview of CRE CDO Process Originate or acquire various types of collateral –CMBS bonds, mezzanine debt, B-notes, whole loans, synthetics Accumulate collateral to meet specific / desired diversification targets Present pool to rating agencies to obtain bond structure –Static versus managed pool Pools are static or managed, with or without ramp periods and reinvestment allowed Negotiate with rating agencies to obtain the desired coverage test requirements Determine the asset manager – normally the issuer Sell investment grade bonds, issuer usually retains the equity piece Contributors include commercial banks, investment banks, insurance companies, finance companies, REITs, etc.

16 16 CDO Process Investors of CDOs include financial institutions, insurance companies, money managers and “others” Through 2005, there were over 100 institutional investors in the US and abroad 55% of investors are domestic and 45% are overseas – primarily UK and Germany Benefits of CDOs Match term funding No mark-to-market risk Cheaper source of financing Increase assets under management and fees

17 17 CDO Process Other attributes of CDOs Motivation typically either: Assets Under Management (AUM) - fee driven motivation, lower credit leverage collateral assets, sell portion of the preferred shares. Typically done by Money Managers. Financing – seek match term funding, non-market to market (alternative to repo), retain preferred shares. Issuers are typically RE Funds, Mortgage REITs, and B-piece buyers. All collateral assets are rated or shadow rated Generally limited to current pay assets Source: Wachovia Securities

18 18 CDO Process Capital structure determined by rating agency–expected default and recovery values on collateral Typical leverage of 20-25x for AUM deals, 3-10x for Financings Other issues: on or off balance sheet, QSPE or SPE; may impact ability to manage Source: Wachovia Securities

19 19 CDO v CMBS CDO: 1. Issuer: Cayman Island Trust 2. Able to hold non-mortgage assets: Unsecured debt (e.g. REIT debt) Mezz, Preferred Equity Derivatives (e.g., swaps, caps, CDS) 3. Able to issue classes as fixed or floating 4. First, second or multiple re-securitization of assets 5. Offers manager flexibility (e.g., static vs. managed, mixed sector, ability to take views on credit), may or may not be fully ramped at closing 6. Collateral quality tests (if managed) 7. Excess spread goes to equity 8. Structural protections: Subordination OC and IC Triggers (no principal write-downs) Collateral quality tests 9. Offers ongoing management fees 10. Global buyer base 11. First loss class: Excess cash flow class No principal write-downs Cash flow can turn on, off and on CMBS: 1. Issuer: Real Estate Mortgage Investment Conduit (REMIC) 2. Trust required to hold only mortgage loans: No unsecured debt No derivatives contracts, no substitution of assets 3. Generally issues debt of similar basis as assets (e.g., fixed – fixed; floating – floating) 4. First securitization of asset 5. Static pools only, 100% ramped at closing, no manager involvement post closing 6. Excess spread sold as Interest Only (IO) Bond 7. Structural protections: Only subordination (principal write-downs) 8. No ongoing management fees 9. Primarily domestic buyer base (fixed rate) 10. First loss class: Fixed coupon Principal write-downs via: Appraisal reductions Realized losses Cash flow shuts off permanently upon 100% write-down. Source: Wachovia Securities

20 20 IV. Future of CMBS & CDO

21 21 Future of CMBS & CDO CMBS FASB issues Liquidity Origination Investments CDO replacing CMBS? Synthetic CDOs Continued growth United States / Canada Europe Stock market

22 22 V. Questions & Answers

Download ppt "The Evolution of the CMBS Market CRE Annual Convention – Maui, HI October 23-26, 2006."

Similar presentations

Ads by Google