Professional Documents
Culture Documents
AN INTRODUCTION TO CMBS
CMBS RESEARCH
David Zhou
212.834.5302
david.x.zhou@jpmorgan.com
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Government actions spurred development of the commercial real
estate market
2
What are Commercial Mortgage-Backed Securities?
FY2005 Property
FY2005 Property Type
Type Distribution
Distribution
Single Other, 2%
Fixed-rate conduit transactions dominate the Borrower,
new issue market, representing over 80% of all 6%
domestic new issuance in 2005.
Conduit,
Multi-
81%
borrower
Floater,
11%
3
Types of CMBS transactions
Conduit – Fixed-rate transaction involving well-diversified pool of loans (typically 100 to 250 loans)
The most granular and diversified of all CMBS transaction types.
“Conduit” was the original deal structure where underlying loans were of roughly equal size (ranging
from $1mm to $30mn) and were generally full leverage (80% loan-to-value ratio).
More recently, the structure of conduit deals has changed. Now, deals that include large loans have
become the norm. Some of the larger loans are lower-leverage “shadow-rated” investment-grade
loans.
Collateral consists primarily of 10-year fixed-rate loans with strong prepayment protection resulting in
10-year “bullet” bonds.
Contains securities rated AAA through NR, with triple-B plus through NR bonds generally placed
privately.
Through the use of credit enhancement in the form of subordination, over 85% of the transaction is
rated triple-A.
Multiborrower-floater - Transactions typically include between 2 and 20 large loans, which generally
utilize floating-rate financing
Transactions require extensive real estate due diligence and analysis due to inherent lack of diversity.
Contains investment-grade through below investment-grade securities and are placed privately.
Borrowers obtain short-term financing with prepayment flexibility. Often contains transitional,
An Introduction to CMBS
“storied” properties.
Analysis and execution heavily dependent on pool diversity and underlying collateral.
Single Asset/Single Borrower – Transactions where credit risk hinges on a single borrower or property
Demand intensive due diligence and analysis.
These transactions can be backed by either one large asset, such as a trophy office building or shopping
mall, or by a pool of assets in which the mortgage loans are crossed-collateralized and cross-defaulted.
These transactions fell out of favor post-9/11 due to the inherent concentrated event risk (e.g., 7
World Trade Center transaction, BALL 2001-7WTC).
4
Who invests in Commercial Mortgage-Backed Securities?
2005 CMBS Participation by Investor Type
2005 CMBS Participation by Investor Type
5
Why do investors purchase commercial real estate assets?
Excellent liquidity
Diversified real estate exposure can be easily obtained via ownership through the CMBS market.
Strong historical performance spurred interest in both direct equity investments as well as for securitized
products.
6
Issuers utilize the CMBS market for a variety of reasons
Wall Street firms and other …securitize portfolios of newly …to empty the warehouse
operators of “conduit” originated loans… and take profits
programs…
Banks, thrifts and insurance …securitize portfolios of …to clear the balance sheet,
companies… seasoned loans… adjust exposures or exit the
sector
Wall Street firms and real …acquire and securitize …to finance the acquisition
estate “opportunity” funds… portfolios of seasoned loans… and/or cash out of the
investment
mortgages on those
smaller commercial properties properties… a portfolio lender
…
7
Basic securitization concepts:
Special Purpose
Special Purpose
Receivables Monthly Seller “True Vehicle Issue
Receivables Seller Vehicle
principal Sale” CMBS
&
interest Commercial Banks
payments
Investment Banks Investors
Investors
Commercial Finance/Mtge co.
Mortgages Insurance company “Trust”
Loans are typically secured by assets with relatively predictable cash flows.
Assets are legally separated from the seller, limiting investor exposure to the
An Introduction to CMBS
seller.
8
Overview of loan origination and securitization process
CMBS Securitization
Assemble pool of
mortgages from internal
warehouse and partner
contributions
An Introduction to CMBS
9
Six general steps of the rating agency credit rating process
O Delinquency O Company and O Analysis of legal O Trust structure O Evaluate transaction O Ensure rating reflects
summary mgmt. overview documents O Cash flow and credit performance and
O Collections O Origination practices O Review of legal allocations enhancement transaction structure
O Losses O Underwriting opinions O Mechanics of credit O Issue deal reports O Identify transactions
O Recoveries O Investment O Bankruptcy analysis enhancement/ O Issue rating letter to be considered for
An Introduction to CMBS
O Credit line ranges philosophy for banks vs. non- protection ratings change
O Geographic O Cash management banks mechanisms O Maintain contact with
distribution and remittances O Evaluation of O Role of servicer issuer
O Industry O Monitoring and bankruptcy remote O Stress tests O Issue press release
distribution collection process SPVs to notify public of
O Collateral O Systems/technology O Review of legal rating change
rating/credit grade review transfers, ownership
distribution O Quality control and security interests
O Biographies of key O Tax treatment
personnel
10
Role of loan servicer
“Master” servicer collects loan payments, maintains records and provides investor
reports and payment advances to the trust.
11
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Issuance volume has grown as the market matures
Global CMBS annual volume ($ Billions)
Global CMBS annual volume ($ Billions)
250
Domestic International
200 70
150
35
100 31
21 169
1 23
29
9
50 12
4 93 89
74 78
1 67
3 57 52
0 1 47
0 37
1 1 26
14 17 15 16
0 3 8
1H
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
An Introduction to CMBS
06
20
Source: Commercial Mortgage Alert
Cumulative domestic issuance is above $860 billion, with about $577 billion outstanding as of
the end of the first quarter in 2006.
13
CMBS issuance by deal type
Despite the heavy fixed-rate conduit issuance in the first half of the year, we expect a
slowdown in the second half of the year from the tempering of the demand for loans due to
rising interest rates. We expect FY 2006 conduit issuance of around $130 billion, roughly 5%
An Introduction to CMBS
Expect less multiborrower floaters with more floating rate loan candidates being originated
as shorter term fixed-rate loans or placed in CDO structures.
Source: Flow of Funds Accounts, Federal Reserve Board of Governors, Commercial Mortgage Alert, JPMorgan
CMBS represent 21% of the commercial mortgage market at $577 billion as of the end of 1Q 2006.
15
Loan concentrations change in response to property type
performance and expectations
U.S. Conduit Issuance by Property Type
U.S. Conduit Issuance by Property Type
Multi- Mobile- Warehouse/
Year Office Hotel family Nursing home Retail Industrial Other
1995 5.4% 7.5% 34.4% 6.9% 3.3% 30.6% 9.8% 2.0%
1996 8.4% 10.0% 38.9% 2.0% 3.9% 29.2% 7.2% 0.4%
1997 17.0% 10.4% 26.9% 3.9% 2.4% 30.3% 7.3% 1.6%
1998 17.3% 11.3% 25.7% 2.8% 2.0% 28.3% 7.4% 5.3%
1999 20.1% 8.1% 27.3% 2.0% 2.0% 27.9% 8.0% 4.5%
2000 25.8% 6.4% 23.1% 0.8% 1.9% 27.9% 10.5% 3.5%
2001 29.1% 5.0% 22.3% 0.1% 1.9% 29.6% 9.8% 2.3%
2002 24.9% 1.5% 23.3% 0.0% 2.1% 36.0% 10.3% 2.0%
2003 28.4% 2.6% 19.0% 0.0% 2.6% 38.5% 6.4% 2.5%
2004 31.2% 3.1% 16.3% 0.0% 4.3% 35.8% 6.8% 2.5%
2005 33.6% 7.6% 15.6% 0.1% 1.4% 32.0% 6.8% 2.9%
2006* 30.0% 11.6% 15.1% 0.2% 1.3% 31.9% 7.1% 2.8%
* As of 2Q 2006
Source: Commercial Mortgage Alert
An Introduction to CMBS
16
Metropolitan Statistical Area (MSA) concentrations*
Top 25 MSAs in conduit deals Top 25 MSAs in floating rate deals
Top 25 MSAs in conduit deals Top 25 MSAs in floating rate deals
Metropolitan Statistical Areas Balance ($bn) % Metropolitan Statistical Areas Balance ($bn) %
1 New York-New ark-Edison, NY-NJ-PA 60.3 13.0% 1 New York-New ark-Edison, NY-NJ-PA 5.9 18.4%
2 Los Angeles-Long Beach-Santa Ana, CA 33.9 7.3% 2 Chicago-Naperv ille-Joliet, IL-IN-WI 1.6 5.0%
3 Washington-Arlington-Alex andria, DC-VA-MD-WV 22.3 4.8% 3 Los Angeles-Long Beach-Santa Ana, CA 1.5 4.7%
4 Chicago-Naperv ille-Joliet, IL-IN-WI 15.6 3.4% 4 Washington-Arlington-Alex andria, DC-VA-MD-WV 1.0 3.1%
5 Dallas-Fort Worth-Arlington, TX 14.7 3.2% 5 Miami-Fort Lauderdale-Miami Beach, FL 1.0 3.1%
6 Houston-Bay tow n-Sugar Land, TX 12.7 2.8% 6 Orlando, FL 0.8 2.5%
7 Miami-Fort Lauderdale-Miami Beach, FL 12.2 2.6% 7 San Francisco-Oakland-Fremont, CA 0.7 2.3%
8 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 11.7 2.5% 8 Phoenix -Mesa-Scottsdale, AZ 0.7 2.1%
9 Atlanta-Sandy Springs-Marietta, GA 10.9 2.4% 9 Dallas-Fort Worth-Arlington, TX 0.6 2.0%
10 San Francisco-Oakland-Fremont, CA 10.6 2.3% 10 Houston-Bay tow n-Sugar Land, TX 0.5 1.5%
11 Phoenix -Mesa-Scottsdale, AZ 9.8 2.1% 11 Honolulu, HI 0.5 1.5%
12 Boston-Cambridge-Quincy , MA-NH 9.4 2.0% 12 Minneapolis-St. Paul-Bloomington, MN-WI 0.5 1.5%
13 Las Vegas-Paradise, NV 9.0 1.9% 13 Boston-Cambridge-Quincy , MA-NH 0.4 1.3%
14 San Diego-Carlsbad-San Marcos, CA 8.4 1.8% 14 Atlanta-Sandy Springs-Marietta, GA 0.4 1.3%
15 Detroit-Warren-Liv onia, MI 7.4 1.6% 15 San Jose-Sunny v ale-Santa Clara, CA 0.4 1.2%
16 Baltimore-Tow son, MD 6.6 1.4% 16 Springfield, MA 0.3 0.9%
17 Seattle-Tacoma-Bellev ue, WA 6.3 1.3% 17 Detroit-Warren-Liv onia, MI 0.3 0.9%
18 Riv erside-San Bernardino-Ontario, CA 5.6 1.2% 18 Pittsburgh, PA 0.3 0.9%
19 Denv er-Aurora, CO 5.2 1.1% 19 Tampa-St. Petersburg-Clearw ater, FL 0.3 0.9%
20 Orlando, FL 4.9 1.1% 20 San Diego-Carlsbad-San Marcos, CA 0.3 0.8%
21 San Jose-Sunny v ale-Santa Clara, CA 4.4 1.0% 21 Las Vegas-Paradise, NV 0.3 0.8%
22 Minneapolis-St. Paul-Bloomington, MN-WI 4.2 0.9% 22 Albany -Schenectady -Troy , NY 0.3 0.8%
An Introduction to CMBS
23 Tampa-St. Petersburg-Clearw ater, FL 4.2 0.9% 23 Buffalo-Cheektow aga-Tonaw anda, NY 0.2 0.8%
24 Charlotte-Gastonia-Concord, NC-SC 4.0 0.9% 24 New Orleans-Metairie-Kenner, LA 0.2 0.7%
25 Sacramento--Arden-Arcade--Rosev ille, CA 3.6 0.8% 25 Nashv ille-Dav idson--Murfreesboro, TN 0.2 0.6%
Top 5 MSAs 146.9 31.7% Top 5 MSAs 11.0 34.3%
Top 25 MSAs 298.0 64.4% Top 25 MSAs 19.2 59.7%
All MSAs 463.0 100.0% All MSAs 32.1 100.0%
Source: Trepp
* As of 7/17/06
CMBS loans are concentrated in large cities including NY, LA, DC and Chicago.
17
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 23
Performance 50
CMBS Derivatives 63
An Introduction to CMBS
Some important terms – Net Cash Flow
Net Cash Flow (NCF) is the property cash flow remaining after underwritten reserves are subtracted.
Examples of reserves include:
— Capital Expenditures (CapEx) – Replacement of major building systems such as roofs
— Tenant Improvements – Physical improvements to the property to attract new tenants to
new or vacated space
— Leasing Commissions – Payments for a real estate broker or leasing agent to help re-lease
vacant space
— Replacement Reserves – Property maintenance costs
Example of Net Cash Flow (NCF) Calculation
Example of Net Cash Flow (NCF) Calculation
Underwritten
Effective Gross Income $ 4,195,198
Total Expenses $ 1,102,956
Net Operating Income (NOI) $ 3,092,242
TI/LC, CapEx, & RR Reserves
CapEx $ -
Tenant Improv ements (TI) $ 10,318
Leasing Commissions (LC) $ 12,897
An Introduction to CMBS
NCF is used to calculate debt service coverage ratios (= NCF / Debt Service) and can also be used to
estimate property values (= NCF / Cap Rate).
The capitalization rate (“Cap” rate), which is calculated as “NCF / Property Price” can be seen
as a property investor’s “required rate of return”.
19
Some important terms – Loan-to-Value / Debt Service Coverage ratios
Loan to Value (LTV) and Debt Service Coverage (DSCR) Calculation
Loan to Value (LTV) and Debt Service Coverage (DSCR) Calculation
Basic formulas
LTV = Loan Amount / Property Value
DSCR = Cash Flow (NOI or NCF)/ Debt Service (i.e., Principal + Interest)
Actual LTV and DSCR - based on appraised values and actual debt service as follows:
Actual LTV = Loan Amount / Appraised Property Value = $36,750,000 / $46,100,000 = 79.7%
Actual DSCR = Net Cash Flow / Actual Debt Service Payments (during amortization period) =
$3,045,812 / $2,529,742 = 1.20
Stressed LTV and DSCR - based on rating agency cap rate and constants as follows:
Stressed LTV = Loan Amount / Est. Rating Agency Value (i.e., NCF / Rating Agency Cap Rate) =
S36,750,000 / ($3,045,812/9.25%) = 111.61%
Stressed DSCR = Net Cash Flow / Rating Agency Debt Service (i.e., Loan Amount X Rating Agency
Constant) = $3,045,812 / ($36,750,000 X 10.09%) = 0.82
An Introduction to CMBS
LTV and DSCR are used to calculate loan proceeds and pricing.
20
Some important terms – Default risk
Definition of defaults (Fitch): Loans that are 60 days or more past due on a debt service
payment or 90 days or more past due on a balloon payment
Using the earlier 80% LTV loan example, assume a large tenant representing 20% of the property cash
flow vacates at the beginning of year 5.
As a result, NOI subsequently declines 20% in Year 5 and DSCR drops below 1.0x.
In contrast, if the loan were underwritten as a 70% leverage loan, even with a large tenant vacating,
the DSCR would remain above 1.0x.
21
Some important terms – Extension (Balloon) risk
Risk that there will not be enough income and equity to pay off the
balloon balance and the loan will extend
22
Mitigating prepayment risk: Common prepayment penalties for
fixed-rate conduit loans
No Penalty
Hard Lockout
Yield Maintenance
2 to 5 Years 10 Years
23
Prepayment risk and call protection
Strong call protection in fixed-rate loans help protect CMBS investors from prepayments
(i.e., early return of principal).
Typically 10-year loan terms (few self- Shorter loan terms (2 to 5 years)
amortizing loans)
25
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Investors analyze CMBS across three categories
27
Classic bond structure – pre-2005 conduit transaction
Subordination
10.50% AA $62MN
Losses
5.00% BBB- $7MN 10-year
2.50% BB $35MN
An Introduction to CMBS
1.25% B $18MN
Unrated $18MN
Sequential pay structure with principal and interest applied first to senior
classes and losses applied first to lower-rated bonds.
Rating agencies determine subordination levels, which sets bond class sizes.
28
A closer look at “traditional” conduit structures issued pre-2005
Triple-A bonds accounted for about 80% of the total transaction.
AA 25.3 24.1 23.7 22.3 17.8 16.3 15.8 13.4 11.1 10.5
A 19.7 18.5 18.7 17.3 13.7 12.7 12.0 9.8 8.2 7.8
BBB 14.8 13.3 12.6 12.3 9.6 8.5 8.2 6.2 4.9 4.6
An Introduction to CMBS
BBB- 12.6 11.5 10.9 10.5 8.3 7.6 7.2 5.2 3.6 3.4
BB 7.9 6.0 5.8 6.1 4.5 4.4 4.1 3.2 2.7 2.5
B 3.3 3.0 3.2 2.9 2.1 2.2 2.1 1.8 1.6 1.6
29
New bond structure – Late 2004 to present
Triple-A bonds now account for 85-90% of a total transaction.
Triple-A bonds have become more highly structured, which we view as inevitable in a
maturing market:
— Can include triple-A bonds swapped to floating rate using a balance guaranteed
swap.
30
New bond structure –JPMCC 2006-CIBC14 conduit transaction
Subordination
3-yr. AAA 5-yr. AAA 7-yr. AAA 7-yr. ASB AAA 9.7-yr. AAA X(IO) AAA 8-yr. A1A AAA
30.000% $141 MN $120 MN $977 MN $2.5 BN not’l
$63 MN $119 MN $430 MN
AAA $279 MN
20.000%
10.125% AA $63 MN
$2.5 BN
mortgage
pool 7.750% A $42 MN
Losses
An Introduction to CMBS
2.125% BB $14 MN
1.375% B $7 MN
Unrated $31 MN
Source: JPMorgan
31
Collateral pool composition
Collateral Pool
nly
nly
Interest Only
st O
est O
I
I
P&
P&
e
P&I
e r
Inter
I nt
An Introduction to CMBS
32
Loan breakout by original maturity term
JPMCC
JPMCC 2006-CIBC14
2006-CIBC14
Original Maturity Term Total by Dollar Amount Total by Count
60 $ 182,076,845 7
61-84 $ 142,367,866 9
85-120 $ 2,390,315,841 183
121-180 $ 48,583,688 6
181-240 $ 24,189,313 2
Total $ 2,787,533,553 207
Original
Original Maturity
Maturity Term
Term by
by Dollar
Dollar Amount
Amount Original
Original Maturity
Maturity Term
Term by
by Count
Count
Source: JPMorgan
33
P&I payment diagram
P&I
P&I Payment
Payment Diagram
Diagram
Balloon payment
P&I
5-year loan
Balloon payment
Balloon payment
An Introduction to CMBS
P&I
10-year loan
34
Triple-A capital structure
JPMCC
JPMCC 2006-CIBC14
2006-CIBC14 Triple-A
Triple-A Capital
Capital Structure
Structure
Face
Amount Credit Payment
Class Rating ($mn) Support WAL window
35
Triple-A capital structure diagram
Amortization
Wide
A-1: 4/06-7/10 A-SB: 7/10-5/15
window
bonds
BONDS
A-4: A-M,
A-2: A-3B:
3/13- 5/15- A-J:
Tight 8/10-
1/16 1/16-
window 3/11 3/14
1/16
bonds
Pricing
3/06
Balloon payment
Balloon payment
LOANS
An Introduction to CMBS
P&I
10-year loan
Balloon payment
Credit bond analysis required, although diverse repayment source (loan amortization) and
young loan age will result in few (if any) defaults.
Tight-window 5-year AAA:
Somewhat interest rate sensitive. Loans have exited hard lockout. May prepay via yield
maintenance.
Credit specific analysis required, focusing on loans with term dates that occur during bond
repayment window
− Focus on loans with full-term IO, coupon dispersion from mean, low DSCRs
− “3 CDR” type analysis does not apply
− Need to consider the possibility that loans may extend at their maturity date
37
Analyzing the bonds
Wide-window 7-year AAA (A-SB):
Somewhat interest rate sensitive. Loans have exited hard lockout. May prepay via yield
maintenance.
Credit bond analysis required, although diverse repayment source (loan amortization) will
result in few (if any) defaults.
Somewhat interest rate sensitive. Loans have exited hard lockout. May prepay via yield
maintenance or freely prepay in the open period.
Less credit specific analysis required, since bulk of loans maturing.
“3 CDR” type analysis does apply. We recommend a more realistic 0.5 CDR, 12 month lag
to recovery, 35% severity of loss, 100% P&I advance by servicer. Can overlay loan-specific
scenarios
An Introduction to CMBS
38
Interest only bonds (IOs)
Traditional IO strip defined as the adjusted NWAC The PAC IO is stripped from the traditional IO.
of the loans minus the NWAC of the principal Its notional amount and size is determined
bonds assuming certain default and prepayment
scenarios
Large amount of proceeds is at times difficult to
clear in the market PAC IOs generally have a limited WAL of 6.25
years and a cash flow duration of about 3.25
years
Note: The general pricing scenario for IO structures assumes 100 CPR after lockout and yield maintenance
39
Subordinate bonds (the B-piece)
Bidding process
— Preliminary information sent to a group of known investors for indicative bid,
— Winning bidder then selected who performs full due diligence before providing a final bid.
Typically purchased by investors with real estate expertise, often with a capital partner.
Due Diligence
— Loans are re-underwritten in a fashion similar to rating agencies,
— B-piece investors occasionally reject loans from a pool.
An Introduction to CMBS
40
The B-piece market has become highly competitive
The combination of attractive relative yields, strong historical performance and the growth in the
CDO market has resulted in several new B-piece buyers entering the market and has created a much
more competitive environment
In 2001, GMAC, ARCap, Allied, and Lennar controlled 87% of the B-piece market. By 2003, 4 new
buyers entered the market, and that number dropped to 64% and was 39%, as of year-end 2005.
After shrinking in size by 7% in 2004 due to a significant decline in credit support levels, the B-piece
market volume grew by 57% in 2005 due to a dramatic increase in overall fixed-rate issuance.
Given the decline in credit support levels, B-piece buyers have had to increase their activity to
maintain similar investment levels; 5 B-piece buyers invested in multiple transactions during 2001;
9 B-piece buyers did so during 2005.
Over the last several years, we have seen a significant compression in B-piece spreads due to the
increase in the number of investors pursuing higher yielding bonds.
An Introduction to CMBS
41
Floating-rate CMBS overview
Have less call protection than fixed-rate loans, which makes adverse selection
an issue:
— “Good” loans prepay leaving underperforming assets to support the trust.
With interest rates down sharply over the past several years, prepays have been
heavy in deals backed by stabilized properties.
Pro-rata structure allows for partial pay down of junior bond classes pari passu
with senior bond classes; stabilizes WAL of senior bonds while mitigating credit
concerns of B-piece investors.
An Introduction to CMBS
42
Review of typical floating rate loan characteristics
Loans are generally uncapped & float over LIBOR.
Additional protection provided by a separate interest rate cap pledged to the trust.
Counterparty is typically AAA or AA rated
Almost always float over one month LIBOR
Mostly interest only
The total debt on the property is often more than the debt securitized in the Trust.
Securitized loan is almost always shadow-rated at least BBB-
Junior participation or mezzanine debt may also exist
43
Floating rate credit structure
Triple-A bonds now account for 85-90% of a total transaction.
Triple-A bonds have become highly structured, which we view as inevitable in a maturing market:
Prepayment penalties are often used to compensate the IO; Extension fees often go to the loan
seller.
44
Floating rate bond structure
Principal Payment: Interest Payments: Misc. Fee Payments:
• Amortization, • Interest Collected • Prepayment Penalties
• Repayments, • Cap payments • Extension Fees
e
nc
• Prepayments,
na
te
• Recoveries
in
Un
Ma
ce
Fre
r
ld
ta
ely
Yie
No
in
P
Interest
rep
tP
Ca
ay
sh
re
Principal ab
pa
le
Fl
ya
ow
I
bl
e
AAA Super Senior Retained
Excess Penalties by seller
AAA IO AAA IO
AAA Subordinated Call NOT Call
An Introduction to CMBS
Losses 45
Floating rate structure at the triple-B level
Pooled Structure
All triple-B bonds secured by all collateral
An Introduction to CMBS
46
Conceptual View of Rake Structure
AAA
Principal Bonds
AA+ AAA
AA IOs
AA-
A+
A
A-
L1 L2 L3 L4 L5 L6 L7
B1 B2 B3 B4 B5 B6 B7
47
Conceptual View of Pooled Structure
AAA
Principal Bonds AAA
AA+ IOs
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
An Introduction to CMBS
B1 B2 B3 B4 B5 B6 B7
48
Why Investors Like Large Loan Floaters
49
Why Investors Do Not Like Large Loan Floaters
Triple-A bonds now account for 85-90% of a total transaction.
Adverse selection results in “better” loans prepaying while “lesser quality” loans often
extend.
Loans are typically freely prepayable after 12 to 18 months, which introduces risk of early
repayment.
Short average life: Loans have 2- to 3-year terms extendable only to five years.
Yes, through a balance guarantee swap embedded in a fixed-rate triple-A conduit bond.
50
Typical fixed-rate capital structure
JPMCC 2005-LDP2 offered certificates
Class Rating WAL C/E Underlying bonds are positioned in the middle of the triple-A capital
(Prepayments (pure & default recoveries)
A-M AAA 9.90 20.000% Most issuers price at least 1 conduit deal each quarter
Consistent supply alleviates supply/demand imbalance
A-J AAA 9.98 12.750%
Floating rate issuance equals about $15bn each year
X-2 AAA NA NA
Conduit issuance has grown steadily each of the past five years
An Introduction to CMBS
E A+ 9.98 9.000%
F A 9.98 8.000%
51
Balance guarantee swap mechanics
Balance Guarantee Swap Trade
Balance Guarantee Swap Trade
1 month Libor + 22
Investors Trust
A-M Coupon
1 month Libor + 22
(S + 32)
$
Flow JPMCC as
Options BGS
Desk Provider
Swaption
By issuing floating-rate liabilities, the Trust is exposed to the interest rate mismatch between the
An Introduction to CMBS
fixed-rate return earned on the assets and the floating-rate payable on the liabilities
The Trust is required to execute a swap in order to eliminate any interest rate mismatch
JPMorgan will agree to pay floating to the Trust in exchange for a set fixed rate
In order to act as an effective hedge for the Trust, the swap must have a balance guarantee
feature
The swap is initially executed based on the initial size of the asset pool and amortizes based
upon the expected amortization speed of the underlying collateral
52
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Recent changes in CMBS loan characteristics
Loan pricing continues to tighten as a result of increased Wall Street lending needs, re-emergence of insurance
companies looking to reinvest excess capital and the continued compression of bond spreads.
Lenders have diversified loan terms and now offer 5-,7-,15- and 20-year terms, with interest-only periods
extending out as far as 10 years or more.
Lenders have relaxed reserve requirements and have also begun to allow more yield maintenance prepayment
protection.
Despite declining subordination levels, overall leverage has increased as traditional conduit loans are less
frequently split into senior/junior components or into pari-passu participations.
Participation by tax exchange investors (1031) and the use of tenant-in-common borrower structures will
continue to increase as broker/dealers bring efficiency to this market.
U.S. conduit LTV trends U.S. conduit loans with interest-only periods
U.S. conduit LTV trends U.S. conduit loans with interest-only periods
105% 10%
100%
100% 9% 90%
80%
95% 8%
70%
An Introduction to CMBS
90% 7%
60%
50%
85% 6% 40%
30%
80% 5%
20%
75% 4% 10%
0%
70% 3% 2001 2002 2003 2004 2005 1H2006
2001Q1
2001Q2
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
54
CMBS exhibit low aggregate delinquency rates
1.0%
0.8%
0.56%
0.6%
0.4%
0.2% 0.09%
An Introduction to CMBS
0.0%
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Source: JPMorgan, Trepp
55
CMBS also exhibit low delinquency and default rates by property type
60+ Day Delinquencies (excluding FC/REO) and FC/REO rates by Property Type as of June 2006
60+ Day Delinquencies (excluding FC/REO) and FC/REO rates by Property Type as of June 2006
Hotel Office
4.5 1.5
3.5
3.0 1.0
Percentage
Percentage
2.5
2.0
1.5 0.5
1.0
0.5
0.0 0.0
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO 60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO
Multi-Family Retail
1.5 1.5
1.0 1.0
Percentage
Percentage
An Introduction to CMBS
0.5 0.5
0.0 0.0
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO 60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO
56
CMBS exhibit excellent rating stability
57
…especially against competing asset classes!
W.A. Annual Rating Transitions*
Upgrade/Stable Ratios (%)
58
10yr triple-A spread movement
10yr triple-A CMBS basis Spread to swaps (bp)
10yr triple-A CMBS basis Spread to swaps (bp)
96
86
76
66
56
46
36
26
16
1/98 7/98 1/99 7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06
An Introduction to CMBS
Source: JPMorgan
Triple-A CMBS spreads have come back in from its recent wides in December 2005 as
investors found that CMBS offered attractive spreads versus other sectors.
Good performance in CMBS as well as less fixed-rate issuance in competing sectors, such as
corporate bonds and ABS, should help maintain a strong technical backdrop for CMBS
spreads.
59
Relative value trades:
10yr triple-A CMBS versus 10-year Agency debentures
10yr Triple-A CMBS basis – 10yr Agencies Asset Swap Spread Spread Differential (bp)
10yr Triple-A CMBS basis – 10yr Agencies Asset Swap Spread Spread Differential (bp)
55
50
45
40
35
30
25
20
An Introduction to CMBS
15
1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04 7/04 10/04 1/05 4/05 7/05 10/05 1/06 4/06
60
Relative value trades:
Triple-A CMBS versus Single-A Corporate Bank paper
10yr Triple-A CMBS basis – JULI US Banks A 7 - 10 Par Asset Swap Spread Differential (bp)
10yr Triple-A CMBS basis – JULI US Banks A 7 - 10 Par Asset Swap Spread Differential (bp)
10
-10
-20
-30
-40
-50
-60
An Introduction to CMBS
1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 9/05 1/06 5/06
Source: JPMorgan
10yr triple-A CMBS are currently trading near parity with single-A rated bank
paper.
61
Relative value trades:
10yr triple-A CMBS versus 30yr CC FNMA
10yr Triple-A CMBS basis – 30yr CC FNMA LOAS Spread Differential (bp)
10yr Triple-A CMBS basis – 30yr CC FNMA LOAS Spread Differential (bp)
60
50
40
30
20
10
0
1/01 4/01 7/01 10/01 1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04 7/04 10/04 1/05 4/05 7/05 10/05 1/06 4/06
An Introduction to CMBS
Source: JPMorgan
10yr triple-A CMBS are currently trading near their widest spread differential
to 30-yr current coupon FNMA paper.
62
Triple-A / triple-B CMBS credit curve has flattened
dramatically this year
Triple-A CMBS basis – Triple-B CMBS Spread Differential (bp)
Triple-A CMBS basis – Triple-B CMBS Spread Differential (bp)
115
105
95
85
75
65
55
45
1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 9/05 1/06 5/06
An Introduction to CMBS
Source: JPMorgan
63
CMBS remains one of the best performing structured finance sectors
64
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Examples of CMBS derivative structures
CMBX.NA index
An Introduction to CMBS
66
What is a CMBS Index Total Return Swap (TRS)?
TRS Payers (short CMBS) are either: 1.) dealers who seek to hedge their
large loan pipelines and/or bond portfolios or 2.) investors looking to profit
from widening spreads.
TRS Receivers (long CMBS) are investors seeking to gain CMBS exposure to a
broad, well-diversified, highly-rated portfolio and also take advantage of
financing and leverage terms, which are usually attractive relative to terms
available for cash bonds.
Traditional TRS (or TRS with duration): Receiver receives the total
return of the index and hence is exposed to both spread and interest
rate risk.
Duration-neutral TRS: Version of TRS which removes interest rate risk
and isolates spread risk (most common form today).
67
Traditional TRS periodic cash flow diagram*
Total Return on CMBS Index
Index Return * Notional
TRS Receiver pays financing cost. In addition, if return is negative, Receiver must pay the
An Introduction to CMBS
68
Duration-neutral TRS periodic cash flow diagram
Duration-neutral TRS focuses exclusively on the change in spread of a given index. Price
changes in the index due to prepayments, defaults or interest rate movements no longer, or
minimally, affect either party.
TRS Payer pays the excess return of a given index, if return is positive.
Netted with funding advantage
An Introduction to CMBS
TRS Receiver pays funding advantage. In addition, if return is negative, Receiver must pay the
Payer the absolute value of the spread return amount.
Similar to the traditional TRS, Receiver will pledge collateral equal to 1% to 5% of the
notional amount.
Unlike traditional TRS, an interest rate swap is unnecessary.
69
What indices are used for the Index TRS?
Other indices- Broad indices (e.g., Lehman ERISA, Lehman Investment-grade), BBB Index,
Long investment-grade indices.
70
What are commercial real estate CDOs (CRE CDOs)?
The equity of a CDO represents an ownership stake in an entity and first loss
position.
The assets are typically managed by a seasoned asset manager with a strong
track record in the respective CDO asset class.
71
CDO motivations: Balance sheet
Assets
Investment Grade or HY bonds/loans
Revolving credit facilities
ABS, RMBS, CMBS and other Structured Products
Issuers
Predominantly Commercial Banks, Insurance Companies
An Introduction to CMBS
Structures
Almost exclusively Cash Flow in the late 1990’s
Often static pools (not actively managed; assets are administered and run-off)
Portfolio is usually close to 100% ramped at closing
In recent years, synthetic transactions allow for more efficient execution
72
CDO motivations: Arbitrage
Arbitrage CDOs
Objectives
Capture market arbitrage by issuing liabilities at low costs of funding and invest in higher yielding
assets on a levered basis
Asset managers sell their expertise in managing specific asset classes and allow other investors to
broaden their credit exposures
Increase assets under management and grow franchise
Receive fee income
Assets
HY bonds and leveraged loans
Investment Grade bonds/Credit Default Swaps
ABS/CMBS/CDOs/Whole Loans and other Structured Products
An Introduction to CMBS
Issuers
Asset Managers including money managers, hedge funds, banks and insurance companies
Credit Structures
Portfolio actively managed (invested/monitored/traded)
Cash, synthetic or hybrid format
Portfolio often not fully acquired at closing
73
CDO issuance format: Cash collateral
Cash Flow
Cash CDOs involve outright purchases (true sale) of assets and funded issuance of notes
Liabilities comprises Senior and Mezzanine debt, supported by the Equity (First Loss) tranche
Hedge
Class A Notes
Counterparties
Class B Notes
Asset
Cash CDO SPV
Portfolio
An Introduction to CMBS
Class C Notes
74
CDO issuance format: Synthetic collateral
Synthetic
Synthetic CDOs, or Collateralized Swap Obligations (CSOs), gain credit exposure by entering into credit
default swaps referencing specific names
High quality Synthetic CDO collateral allows for a very large, unfunded portion of synthetic CDO
liabilities (the ‘Super Senior Swap’), which cheapens overall liabilities
Super senior tranche’s credit quality is assumed to be better the AAA-rating level
75
CDO issuance format: Cash vs. synthetic
Synthetic
Synthetic CDOs have increased as a percentage of all CMBS CDOs, especially after the
standardization of ISDA documentation in June, 2005.
($millions)
14,000
Cash Synthetic
12,000
10,000
8,000
6,000
4,000
An Introduction to CMBS
2,000
0
2001 2002 2003 2004 2005 2006YTD*
*As of year-to-date March 2006
Source: JPMorgan
76
What is a credit default swap (CDS)?
77
Notional CDS outstanding (Corporate, ABS, CMBS & RMBS)
CDS volume has grown dramatically over the past several years
12,430
8,422
5,442
3,779
2,192 2,688
An Introduction to CMBS
1,563
632 919
1H2001 2H2001 1H2002 2H2002 1H2003 2H2003 1H2004 2H2004 1H2005 2H2005
Source: JPMorgan
78
Who are the CMBS CDS participants?
Hedge funds
Money Managers
Loan originators
Insurance Cos
SF CDO Issuers
79
Basic CDS trade mechanics
Contingent floating-
rate payment
Protection Protection
Seller Buyer
Fee/Premium Fixed-
Long risk Short risk
rate payment
Sell CDS/Protection Buy CDS/Protection
Receive fixed periodic Pay fixed periodic
payments payments
Economically similar to Economically similar to
owning a cash bond shorting a cash bond
Protection Buyer: The counterparty that wants to eliminate, or reduce, credit risk.
The buyer pays a fixed periodic premium, which is quoted in basis points as a percentage of
An Introduction to CMBS
$100 (Par)—
Cash Protection Recovery rate
Protection
settlement Seller Buyer
Source: JPMorgan
81
Pay-As-You-Go (PAYG or PAUG) Settlement
$3mn floating
notional amount of the trade is payment
written down by the amount of the Protection Protection
floating payment Seller Buyer
Fixed payment
($10-$3mn notional)*(1.35%)=$94,500
Source: JPMorgan
82
PAYG reimbursement given a credit event reversal
Source: JPMorgan
No payment
An Introduction to CMBS
83
Interest shortfall nuances: Fixed-cap versus uncapped
Fixed-cap
Limits interest shortfall payment to the fixed-rate premium paid by protection buyer.
Shortfall that exceeds the fixed-rate premium is not covered by the protection seller.
Uncapped
Mandates full reimbursement for the entire coupon that suffers a shortfall.
Not limited to the fixed-rate premium paid by buyer. Protection seller may be required to pay
An Introduction to CMBS
84
Recap: PAYG credit events & resulting cash settlement
85
Valuing CDS: Mark-to-Market
Measures the change in value of a CDS position from trade date to the current date
Æ important when determining upfront payment for novation trades.
Reference obligations with longer durations have higher PV01s than do reference
obligations with shorter durations and are more sensitive to spread movements.
An Introduction to CMBS
86
2006 non-structured CMBS (non CLN) CDS trading activity
Vintage views have been narrowly focused BBB- received the most interest
BB A
2003 1% 13%
8%
2005
47% BBB
2004
19%
45% BBB-
67%
Source: JPMorgan Source: JPMorgan
CDS spreads have tightened, indicating more protection sellers than protection buyers
Rating level YE2005 1Q2006 6/30/06
An Introduction to CMBS
87
Valuing CDS: Carry and break-even spread movements
Carry is the annualized contract premium times the notional trade amount
= {Premium (in bp)} * Trade Notional Amt * Act/360.
Selling protection is a positive carry trade, buying protection is a negative carry trade.
Protection buyers need to consider the amount of spread widening needed to break even
={Offer Spread * Trade Horizon (in yrs)} / (Horizon Duration) + Bid/Offer Spread.
10
3-Month 6-Month 9-Month 1.00 Year 1.25 Years 1.50 Years 1.75 Years 2.00 Years
Source: JPMorgan
88
CMBX.NA launched on March 7, 2006
Summary of CMBX.NA Terms
Traded Indices CMBX.NA.AAA
(rolled every 6 months) CMBX.NA.AA
CMBX.NA.A
CMBX.NA.BBB
CMBX.NA.BBB-
Reference Obligations Each index is an equally-weighted composite of the corresponding
tranche of the same rating from 25 newly issued CMBS transactions
Structure ISDA, Pay-As-You-Go (PAYG)
Roll Dates October 25, April 25 (or next business day, respectively)
Scheduled Termination Date Legal final maturity of reference obligation
Notional Each reference obligation must have a current factor of 1.0
Fixed Rate Payments Established on the roll date
An Introduction to CMBS
89
Rules for inclusion for CMBX
Since CMBX was designed to replicate an investment in a diversified basket of newly issued CMBS at a
given rating level, standardized rules for inclusion were carefully drafted to maximize the
transparency of the index’s components, which should enhance trading liquidity.
Deal-level criteria:
The transaction must be rated by at least any two of Fitch, Moody’s or S&P.
The deal must include securities with tranches rated AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2
and BBB-/Baa3. In instances where there are more than one triple-A class with equal
credit enhancement, the tranche with the longest weighted average life will be included.
In instances where a tranche is split-rated, the lower of the ratings will be used.
An Introduction to CMBS
The maximum concentration of any single property-type can not exceed 60% by dollar
value.
The maximum concentration in any single state must not exceed 40% by dollar value.
90
Rules for inclusion for CMBX
Tranche-level criteria:
For the triple-A sub-index the aggregate principal amount of the tranche must be greater
than $100mn
For the CMBX.NA.AAA index, each reference obligation must have an expected weighted
average life of greater than eight years and less than 12 years from the date of issuance
using a 0% CPY scenario
Furthermore, the expected weighted average life can not decrease by more than one year
when calculated using a 100% CPP scenario and by more than two years when calculated
using a 100% CPY scenario
An Introduction to CMBS
91
CMBX.NA reference obligation tranches
Reference Obligation Entity Name CMBX.NA.AAA.1 CMBX.NA.AA.1 CMBX.NA.A.1 CMBX.NA.BBB.1 CMBX.NA.BBB-.1
1 BACM 2005-4 A-5A B D G H
2 BACM 2005-5 A-4 B D G H
3 BACM 2005-6 A-4 C F J K
4 BSCMS 2005-PWR10 A-4 C F J K
5 BSCMS 2005-PWR9 A-4A C E H J
6 BSCMS 2005-TOP20 A-4A C E H J
7 CD 2005-CD1 A-4 C E H J
8 CSFB 2005-C5 A-4 C F J K
9 CSFB 2005-C6 A-4 B E H J
10 GCCFC 2005-GG5 A-5A B D G H
11 GECMC 2005-C4 A-4 C E H J
12 GMACC 2006-C1 A-4 B E H J
13 JPMCC 2005-CIBC13 A-4 B D G H
14 JPMCC 2005-LDP4 A-4 B D G H
15 JPMCC 2005-LDP5 A-4 C F J K
16 LBUBS 2005-C5 A-4 C F J K
17 LBUBS 2005-C7 A-4 C F J K
18 LBUBS 2006-C1 A-4 C F J K
19 MLMT 2005-CKI1 A-6 B D G H
20 MLMT 2005-LC1 A-4 B D G H
An Introduction to CMBS
Source: Markit
92
CMBX.NA reference obligation statistics*
IO% Rating Agency LTV Loan Size ($mn) Loan Concentrations Property Type Mix
Deal Loan/ % Inv.
Pricing Size Property Grade %TIC Full Partial Multi-
Date Deal Name ($mn) Count Loans Borrower Term Term Total Fitch S&P Moody's Max Min Avg. Top 3 Top 5 Top 10 Office Retail family Hotel Ind. Other
09/15/2005 BACM 2005-4 $1,586 128/149 1.1% 6.4% 30.1% 42.8% 72.9% 100.8% 102.1% N/A $110.0 $1.0 $12.4 20.7% 31.7% 46.2% 34.2% 26.0% 23.3% 7.6% 5.1% 3.8%
09/30/2005 BACM 2005-5 $1,962 106/120 7.9% 7.6% 29.2% 44.4% 73.6% N/A 104.9% 102.1% $116.0 $1.2 $18.5 16.2% 25.9% 42.6% 40.8% 27.0% 18.5% 4.4% 3.3% 6.0%
12/16/2005 BACM 2005-6 $2,942 163/919 23.8% 7.2% 23.8% 37.8% 61.6% N/A 90.6% 92.5% $260.0 $1.0 $16.8 19.6% 28.2% 43.3% 38.6% 15.6% 23.6% 11.4% 1.5% 9.3%
12/09/2005 BSCMS 2005-PWR10 $2,634 212/232 9.2% 4.4% 19.6% 45.9% 65.5% 95.2% 98.0% N/A $275.7 $1.0 $12.4 23.6% 31.4% 40.2% 14.5% 42.5% 18.8% 10.1% 4.2% 9.9%
09/14/2005 BSCMS 2005-PWR9 $2,152 200/229 1.4% 4.4% 14.0% 41.9% 55.9% N/A 98.4% 97.4% $137.5 $1.0 $10.8 14.8% 19.7% 29.9% 15.8% 45.9% 22.0% 8.6% 4.2% 3.5%
10/20/2005 BSCMS 2005-TOP20 $2,073 221/285 28.9% 4.5% 33.5% 22.0% 55.5% 83.1% N/A 86.5% $121.1 $0.5 $9.4 16.4% 24.4% 36.0% 26.4% 38.0% 8.8% 10.1% 7.6% 9.3%
10/27/2005 CD 2005-CD1 $3,903 225/261 23.1% 12.2% 24.7% 43.5% 68.2% N/A 99.1% 98.5% $290.0 $1.3 $17.3 17.8% 23.2% 32.8% 40.1% 29.8% 14.9% 6.6% 3.5% 5.2%
10/26/2005 CSFB 2005-C5 $2,937 281/337 17.2% 13.2% 10.3% 60.1% 70.4% 93.9% 93.5% N/A $310.0 $0.5 $10.5 18.0% 23.1% 33.3% 26.0% 30.6% 25.3% 8.6% 1.2% 8.5%
12/14/2005 CSFB 2005-C6 $2,505 229/241 6.2% 8.8% 17.8% 47.5% 65.3% N/A 97.7% 102.3% $175.0 $0.9 $10.9 19.0% 25.0% 34.0% 29.0% 29.9% 29.1% 5.8% 3.3% 3.0%
10/20/2005 GCCFC 2005-GG5 $4,295 173/267 2.7% 6.0% 30.5% 48.4% 78.9% N/A 106.0% 104.3% $320.0 $1.5 $24.8 20.7% 30.0% 41.4% 33.0% 35.3% 6.4% 15.4% 8.8% 1.1%
12/02/2005 GECMC 2005-C4 $2,398 167/225 5.1% 9.3% 16.2% 43.8% 60.0% N/A 105.9% 105.5% $122.0 $1.9 $14.4 13.3% 20.8% 34.5% 29.8% 35.8% 14.1% 8.2% 2.3% 9.8%
01/25/2006 GMACC 2006-C1 $1,730 121/216 12.4% 6.7% 26.5% 50.0% 76.5% 96.8% 101.6% N/A $106.3 $1.0 $14.2 17.4% 27.2% 43.4% 29.9% 26.1% 29.2% 7.8% 2.4% 4.6%
11/18/2005 JPMCC 2005-CIBC13 $2,721 236/281 0.0% 9.7% 24.4% 41.2% 65.6% 102.4% N/A 102.0% $180.9 $0.9 $11.5 16.7% 21.8% 31.6% 36.1% 27.3% 22.2% 7.8% 5.7% 0.9%
09/22/2005 JPMCC 2005-LDP4 $2,677 186/244 5.0% 7.2% 29.0% 39.7% 68.7% 100.8% N/A 100.5% $349.7 $1.1 $14.4 21.7% 27.7% 38.5% 29.6% 35.4% 18.6% 3.3% 11.1% 1.9%
12/16/2005 JPMCC 2005-LDP5 $4,322 195/313 11.1% 4.6% 34.3% 40.9% 75.2% 95.1% 98.1% 97.1% $335.0 $0.9 $21.5 20.7% 29.4% 45.0% 44.7% 25.5% 20.8% 2.1% 4.1% 2.7%
08/15/2005 LBUBS 2005-C5 $2,344 117/215 34.4% 9.9% 37.3% 33.8% 71.1% 89.4% 91.8% N/A $285.1 $1.1 $20.0 33.0% 43.9% 57.1% 37.3% 34.9% 10.5% 11.6% 1.3% 4.4%
10/25/2005 LBUBS 2005-C7 $2,347 143/227 36.3% 6.9% 40.5% 31.8% 72.3% 90.0% 91.0% N/A $285.1 $1.3 $16.4 27.0% 36.9% 53.5% 50.1% 23.0% 12.2% 10.0% 1.2% 3.6%
01/20/2006 LBUBS 2006-C1 $2,476 145/273 33.5% 3.7% 41.6% 30.1% 71.7% 90.1% 97.9% N/A $420.8 $1.1 $16.9 28.2% 38.1% 57.1% 38.6% 26.9% 7.4% 21.4% 2.7% 3.0%
12/01/2005 MLMT 2005-CKI1 $3,074 169/299 9.9% 8.6% 19.6% 42.5% 62.1% N/A 98.8% 98.4% $255.0 $0.3 $18.2 18.5% 26.0% 39.7% 24.3% 43.4% 8.4% 10.0% 5.0% 8.9%
An Introduction to CMBS
12/16/2005 MLMT 2005-LC1 $1,546 142/176 8.1% 6.9% 3.8% 65.7% 69.5% N/A 99.9% 100.8% $125.7 $1.0 $10.9 19.9% 26.5% 37.5% 24.5% 33.2% 27.2% 7.3% 2.9% 4.9%
11/17/2005 MSC 2005-HQ7 $1,957 279/328 0.0% 15.4% 16.3% 31.9% 48.2% N/A 104.2% 103.2% $141.0 $0.3 $7.0 14.6% 19.3% 26.5% 30.6% 31.9% 13.6% 10.5% 4.1% 9.4%
10/12/2005 MSC 2005-IQ10 $1,547 210/220 11.6% 8.7% 24.1% 35.2% 59.3% N/A 95.2% 93.1% $196.0 $0.8 $7.3 23.4% 31.4% 46.6% 34.2% 23.8% 23.7% 7.4% 2.1% 8.7%
01/20/2006 MSC 2006-TOP21 $1,376 121/177 36.8% 7.0% 36.6% 28.2% 64.8% N/A 83.8% 83.1% $137.0 $0.7 $11.4 25.2% 37.3% 52.9% 25.1% 49.2% 8.1% 13.1% 2.5% 2.0%
10/14/2005 WBCMT 2005-C21 $3,250 233/329 5.2% 11.7% 31.9% 48.3% 80.2% 100.7% 103.7% 101.1% $200.0 $0.6 $13.9 17.6% 25.8% 39.6% 45.2% 15.7% 20.4% 6.9% 2.6% 9.2%
12/15/2005 WBCMT 2005-C22 $2,534 151/238 3.7% 14.4% 21.6% 56.1% 77.7% 101.0% 104.1% 101.7% $162.5 $1.4 $16.8 18.3% 27.9% 39.2% 25.5% 22.3% 23.2% 11.2% 3.3% 14.5%
Average $2,532 182/272 13.4% 8.2% 25.5% 42.1% 67.6% 95.3% 98.5% 98.3% $216.7 $1.0 $14.3 20.1% 28.1% 40.9% 32.2% 31.0% 18.0% 9.1% 3.8% 5.9%
* The statistics are based on rating agency presale reports so they may not reflect the precise composition at the launch of the indices.
Source: JPMorgan, Rating Agency Presale Reports
93
The CMBX: Some important facts
Rolled every six months and includes bonds from most recently issued deals, which
mitigates the potential for reference obligations to exhibit credit-specific nuances.
Third parties, and no single dealer, are responsible for administering and marking
the Index, while 14 dealers contribute prices.
An Introduction to CMBS
94
The CMBX: Activity to date
Since its launch, activity in the CMBX.NA.AAA sub-index has dwarfed that
of the other sub-indices by a ratio of approximately 10:1.
The majority of the activity, though, has been inter-dealer. Only a few
retail accounts have participated.
An Introduction to CMBS
95
The CMBX: Performance to date
Spreads have tightened across the credit curve The CMBX credit curve has flattened
At Roll Date Closing Spread Spread Change
Fixed Versus 160
coupon June 30th, fixed
Sub index (strike) 2006 Day Week Month coupon 140
100
60
CMBX.NA.A 35.00 30.12 -0.12 0.54 1.95 -4.88
40
20
CMBX.NA.BBB 76.00 71.67 -0.95 -1.33 5.03 -4.33
0
AAA AA A BBB BBB-
An Introduction to CMBS
96
The CMBX & single-name CDS: Potential applications
Annualized spread
widening break even 1.06 bp 2.55 bp 4.16 bp 9.95 bp 15.39 bp
Source: JPMorgan, Markit
97
The CMBX & single-name CDS: Potential applications
Basis trades, which are trading strategies based on the spread differential
between a cash bond and a single-name CDS contract.
140 130
(15) (20)
An Introduction to CMBS
130
120
120 Cash BBB- (LH Axis)
(20) (25)
110 CDS BBB- (LH Axis)
110
Basis (RH Axis)
100 (25) 100 (30)
02/16/2006 02/21/2006 02/26/2006 03/03/2006 03/08/2006 03/08/2006 03/13/2006 03/18/2006 03/23/2006
98
The CMBX & single-name CDS: Potential applications
In the example below, the CMBX.NA.AA has tightened more than any other CMBX
sub-index on a percentage basis. One possible trade would be to sell a “credit
butterfly” by buying CMBX.NA.AAA and CMBX.NA.A and selling the CMBX.NA.AA.
Spread Change (bp) Percent
Fixed Closing Versus Tightening 6-month Historical
Coupon Spread Fixed Since Roll Cash Spread
Sub Index (Strike) 03/24/2006 Day Week Month Coupon Date Volatility (bp)
CMBX.NA.AAA 10.00 7.50 -0.06 -0.91 N/A -2.50 -25% 1.37
CMBX.NA.AA 25.00 17.29 -0.21 -1.46 N/A -7.71 -31% 2.12
CMBX.NA.A 35.00 27.64 0.02 -1.17 N/A -7.36 -21% 2.45
An Introduction to CMBS
99
The CMBX & single-name CDS: Potential applications
100
Conclusion
The growth of the CMBS industry has broadened its investor base and has
increased their sophistication.
101
Analyst Certification
The analyst(s) denoted by an “AC” certifies that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and
(2) no part of any of the analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research.
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next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the
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