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