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CRE Finance World, Summer 2012

CMBS Opportunities Still Exist, Despite the Rally Note that while deal losses vary significantly across the various Figure 7 trades shown in the figure — bond-level principal losses (not Recent Spreads on 2005–2007 Dupers and 2005 AMs Versus shown) are fairly negligible under our Base model scenario. So from Projected Deal Cumulative Loss (Base Scenario) this perspective, it makes sense to opt for the cheapest 2005- vintage AM, or the cheapest duper within any particular vintage. Figure 6 shows that the relationship between spread and projected cumulative loss can change quite dramatically over time as the market’s level of risk aversion changes. Loss expectations not captured by the model would also alter these inter-relationships. Therefore, in addition to traditional credit analysis, investors should be monitoring these relationships to identify investment opportunities — a significant steepening of the trend line within any CMBS sector may be a signal to buy the spreadier bonds. Certain Later Vintage Dupers Offer Pickups to Earlier Vintage Cleaner Dupers and Even Some AMs Looking across vintages, 2007-vintage dupers backed by weaker credit quality collateral offer triple-digit pickups to many 2005- and 2006-vintage dupers (Figure 7, left panel). Likewise, most 2006-vintage dupers also offer attractive pickups to 2005-vintage dupers backed by cleaner collateral. As of the end of the first quarter, 2007-vintage dupers with projected deal cumulative loss (under the Base scenario) exceeding 8% or so were trading in the low- to mid-200s area. Cleaner 2005 bonds (projected deal loss under 4% or so) were trading in the 80s area, while those backed by weaker collateral were generally trading in the low 100s. Meanwhile, 2006-vintage dupers backed by collateral with projected deal loss under 6% or so were trading in the low- to mid-100s. The later vintage dupers tend to carry lower ratings than earlier vintage bonds, which could preclude certain investors from partici- pating. Many 2005-vintage dupers are still rated triple-A by S&P, Moody’s, and Fitch. But some 2006-vintage dupers are rated as Source: Citi Investment Research and Analysis low as A- by S&P and many 2007-vintage dupers are rated as low as BBB- by S&P and Aa3 by Moody’s. Moreover, spread volatility could be more of a concern on the later-vintage classes. But for investors who can invest in non-triple-A assets and are less concerned with mark-to-market risk, the later-vintage bonds offer good value. CRE Finance World Summer 2012 48


CRE Finance World, Summer 2012
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