Wednesday, March 25, 2009

Commercial Real Estate Marking: CMBS Relative Value

At first opportunity (but not for a few days) I will write an extended post on the cash flow dynamics of both CRE whole loans and CMBS. There seems to be too much confusion on the topic, which is at the heart of the "is the price fair/is it not fair" argument for the toxic asset bid/offer disconnect in the PPIP. Below is a good chart I tracked down which shows the most recent prices on sub-AAA CMBX tranches, and how this flows through in terms of spreads, loss rates, loss timings, average deal losses and a market-to-base case (flat loss assumption) ratio. Not surprisingly the MTB deal loss ratios become more pronounced the higher up in the pool one goes, with the AJ likely having the best or worst bang for the buck (AAA is excluded from this analysis), depending on one's optimism/pessimism. Curiously, based on market implied statistics, the 2006-2008 vintages rated A and below have an average 100% loss within 3 years!Some other concepts to consider: the dominant role of GSEs and commercial banks in CMBS issuance, the lagging DSCR impact on longer-dated lease term properties (office and retail doing better than multi-sector for now: 2006 vintage average leases begin rolling this summer, should make for a curious move in DSCR), the transition of numerous IOs to amortizing, the CMBX-cash basis (negative blow out in December thru February) an substantial convergence recently implying securities liquidity considerations are mitigating (together with the ability to blame the market for mark aberrations), and lastly unemployment itself: CMBS delinquencies peak 1 year after unemployment bottom inflection point. 

thanks to Lehman for raw data
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14 comments:

Anonymous said...

Unable to enlarge the table.

Lenny Vee said...

Yes, I second that notion. Please put up an enlarged version - it would be most appreciated!

OhmeOhmy said...

Looking forward to your write up on cash flow dynamics of both CRE whole loans and CMBS.

Can you please link the CMBS table(figure11.jpg thumbnail) to the full size image.

Thank you.

Imee said...

Would it be bad if I seconded that as well? I'd love to understand the explanation more by seeing the chart properly, but the cursor only turns into a hand but no hyperlinks would open...

Anonymous said...

First you post Barclays work here and then you put the LEH dig there...WTF! How do you get away with posting this proprietary information in a public forum?

Anonymous said...

i can't read it because the numbers are too small!

Anonymous said...

@ 9:16 AM

It's suppose to be too small. Apparently it's an extortion attempt against Lehman. This morning Tyler changed the caption under the image but did not correct the hyperlink problem.

Next he'll replace the entire image with the photo of a pig putting on lipstick.


We'll getting tooled.

Anonymous said...

@ 9:22 AM retraction issued.

daddyo said...

There are far too many non-CMBS participants playing the CMBX-as-macro-bet for it to be used as a metric for anything other than general tone.

Cash spreads are arguably a better indicator of expected losses, because at least the cash flows are direct, and there is little ability (GG10 A4's and TRS being the only real options) to short the cash market. This eliminates macro players for the most part.

Anonymous said...

what is the difference between CMBX.1 and 2?

daddyo said...

Vintage. Without looking it up, I think 1 is CMBS from late 2005 / early 2006, 2 is late 2006.

Anonymous said...

cmbx.1 is late 2005 to early 2006,...cmbx.2 is mid 2006.

lehmans been putting this info out for a while, pretty much anyone with an email address can get it (heartbeat not required). i built one of these models, you just have to make some assumptions to get to loss% and timing

not sure cash would be better indicator of losses since it has other risks associated with owning it and is subject to too much technical factors.
frankly, neither is a good indicator for losses, market is a mess, maybe if you use a 15% discount rate since thats about the risk free return on these products.

aviat72 said...

Thanks Tyler. Really looking forward to more details about this market. I hope it is not all doom and gloom!

daddyo said...

At the AAA level, maybe CMBX could provide some relevant data, but I wouldn't take it on its own.

Anywhere below AAA, and the disconnect between CMBX and cash is enormous, and the flows are almost nonexistant in both. It's really not a pricing mechanism for anything worthwhile.