Credit Risk — Europe
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This two-day course is designed to give an overview of the Commercial Mortgage-Backed Securities (CMBS) product, so that participants have the technique to analyze transactions, and understand the key drivers of risk for this type of investment.
Key Learning Outcomes:
- Have a benefit of a structured, memorable, technique for analyzing commercial mortgage-backed transactions
- An introduction to understanding the main risks in investing in pools of commercial real estate loans
- Understand the structures of deals (in both pre- and post-financial crisis), and the logic behind the structures
- Evaluate the effectiveness of cash flow waterfalls and structural elements which protect investors from loss
- Understand relative value for the CMBS investment, and the difficulties specific to this asset class in determining relative value
The goal of this section is to highlight components of CMBS issuance and establish a framework of analysis for CMBS.
Analytic approach to credit evaluation
- A structured four-step approach: purpose, payback, risks and structure
- Application of the structured approach to various types of CMBS securities
- Parties to the transaction and their roles
- Exercise: comparing single- and multi-borrower transactions.
Risks to Repayment
The goal of this section is to consider issues related to the collateral, the servicers and the originators which could affect CMBS repayment.
- Identifying key variables which impact the likelihood of default and severity of loss
- Importance of property quality on cash-flow
- Examining rent rolls for tenant quality and lease terms
- LTV and DSCR
- Stressing cash-flows: the use of historical performance data in sizing credit enhancement
- Model approach: deriving credit enhancement requirements
- Multi-jurisdictional issues
- Exercise: evaluating sustainability of property cash-flows
- Exercise: estimating loan loss levels and credit enhancement.
Servicer and originator evaluation
- Types of servicers and their roles
- Challenges for servicers in the current environment
- Loss mitigation: capabilities and strategy
- Servicer ratings: why, how and impact on credit enhancement
- Assessing replacement risk
- Risks related to originators.
The goal of this section is to understand document provisions relating to the priority of payments and other structural features of CMBS.
- Sizing: assessing the level of credit enhancement required for target ratings
- Understanding and evaluating the differing types of credit enhancement: internal vs. external.
- Waterfall structures: protecting the priority of payments
- Sources and applications of funds: sequential and pro rata
- Expected and rated maturity
- Available funds caps: investor perspective
- Use of excess spread in CMBS transactions
- A/B notes and the importance of intercreditor agreements
- Exercise: analyzing provisions of documents to evaluate the impact on cash-flow waterfalls.
- Access to liquidity and limitations; providers of liquidity
- Establishing, maintaining and adjustments to reserve funds
- Mitigating risk through the use of swaps
- Addressing counterparty risk
- Synthetic transactions and reference pools
- Substitution of assets
- Further advance controls: criteria hurdles
- Loan covenants.
- Isolation of assets
- True sale vs. synthetic structures
- Representations and warranties
- Events of default
- Exercise: examining differences between synthetic and true-sale transactions.
- State of the commercial market and the impact of the recession
- Valuation issues
- Lack of refinancing options.
The goal of this case study is for course participants to apply the CMBS analytic framework to examine the evolution of a CMBS single-borrower transaction.
The goal of this section is to understand how market conditions affect CMBS performance
- Surveillance: evaluating and predicting collateral performance
- The need for disclosure: timely and adequate reporting
- Incorporating current market conditions into the rating analysis
- Exercise: anticipating rating changes through surveillance.
Who should attend
This course is particularly useful to employees in support functions around the commercial mortgage product and the securitization product. This might include operations managers (servicer staff, support staff in payments and collections), but also people who work on the legal side, the trustee functions, servicer functions, and paying agent functions. It is also very useful for anyone entering the business as a graduate or moving into the sector from a different part of finance.