Wednesday, February 11, 2009

CMBS Fact of the Day

From 1995 to 2007, the average subordination level for AAA-rated CMBS tranches fell from 34.1% to 12.3%. (Data from Wachovia Capital.) I just thought you should know that, since the government has decided to get in the CMBS game. I hope you like risk...

6 comments:

"Mindles H. Dreck" said...

The so-called super-senior layers have about 30% subordination, and Moody's is about to downgrade all those old-fashioned senior layers. This is some sort of collusion, as the govt. will only put AAA in the TALF.

So, the govt-subsidized will have 30% subordination, and we have one more data point to show that ratings are often determined by exogenous non-fundamental factors.

Economics of Contempt said...

Right now I know at least 2 of the banks are expecting that the rating agencies will require at least 26% subordination, and probably 30%, for AAA-rated CMBS tranches.

Everyone right now wants to know what the criteria will be for AAA-rated CMBS and ABS because of the TALF. The rating agencies -- who are perhaps the biggest suckers in financial market history -- will probably try to draw a line in the sand with 30% subordination for CMBS, but the banks will try hard to push it lower.

I've seen that movie before, and it doesn't end well for the rating agencies.

Concrete Jungle said...

The rating agencies only require around 12-14% subordination, but the CMBS investor base has always required more. When it got too low in 2005, they demanded a 20% subordinated bond, and later a 30% subordinated bond. Over 80% of the typical deal is 20% subordinated or higher, and about 70% is 30% subordinated or higher.

Moody's finished their downgrades this week of the lowest-subordinated AAAs, bringing most to the A-handle level. In all, they've downgraded about 1,200 CMBS bonds in 2009...

No one has believed the rating agencies in this market for a very long time. They used old out-dated cap rates to come up with assumed LTVs, had a horrible rating regime that was so blatantly ineffective that the investors produced their own structure requirements.

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