Now raising intellectual capital
The repackaging of commercial real estate mortgage-backed securities made a splash in July as banks offered investors panicked by looming ratings downgrades better protection against potential losses. But, it turns out that there’s only been 9 such deals rated by Moody’s, for a total of around $1.2 billion, with Credit Swisse doing three of them.
That’s not a huge amount for a $700 billion market and I suspect the reason is there’s just not that many natural buyers for the riskier, or junior, pieces that need to be sold in a re-REMIC. Repackaging doesn’t magically make the risk go away. What it does is split an existing tranche in two so one piece is better protected while the second is worse off. Who wants to buy the worse off piece when the outlook for commercial real estate is so awful.
Here’s a nice diagram from a recent Moody’s report to show how it works. (HT Alphaville)
The most subordinate super-senior tranche in a CMBS transaction is the last super-senior bond to be paid out of principal amortization and recoveries. However, it is pari-passu (or on the same footing) with the other super-senior tranches with regard to the allocation of losses.The super-senior CMBS bonds (A-1 through A-4) usually comprise 70% of the bond structure, and therefore have 30% credit enhancement to absorb any losses in the CMBS loan pool. The resecuritization is usually carved up into senior and junior portions representing 72% and 28% of the resecuritization, respectively. This effectively creates a senior resecuritization tranche with 50% credit support relative to the underlying deal and a junior resecuritization tranche that attaches at 30% credit support and detaches at 50% credit support, again relative to the underlying pool.
FT’s Alphaville has a great post on re-Remics and the push to make them respectable, at least in the eyes of the Federal Reserve and its TALF program.
If the Fed were to accept repackaged CMBS in its TALF program, it would go a long way in feeding the securitization machine that Wall Street banks are eager to jump start. But is that a good thing? The re-Remics are essentially repacking problem CMBS bond deals so they can create a “bullet-proof” AAA slice for investors who don’t want to have to worry about downgrades. If you’re thinking you’ve seen this movie before, you’re not alone.