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CRE Finance World, Winter 2012

TRX.II.AAA.1 Primer: Structure, Cashflow & Breakeven Analysis Managing Director and Director AssociateJoseph Ruszkowski, CFARichard HillBrian P. Lancaster Head of MBS, CMBS Royal Bank of Scotland Royal Bank of Scotland and ABS Strategies Royal Bank of Scotland T after January 1st, 2010. The purpose of the new indices Structure & Cash Flow MechanicsIn addition, by going long one of the TRX.II indices, rather thancash, the investor can gain exposure to multiple CMBS 2.0 AAAtranches diversifying the idiosyncratic risk of any one deal. last-1,2he TRX.II indices were launched “officially” on October 1with trading beginning on Monday October 3. The TRX-IIindices reference a maximum of 25 “qualifying”cashflow AAA bonds from CMBS 2.0 / 3.0 deals issued is to allow investors and the Street to gain exposure to the new The TRX.II indices are structured as synthetic Total Return Swap CMBS 2.0 market without investing in individual cash deals as was (TRS) indices utilizing the same contract structure as the exist- done in the total return swap market prior to the crash. In addition, ing TRX.NA.AAA.1, but with one notable difference — it will be a the new indices are designed to serve as a hedging vehicle for rolling index to allow for the inclusion of new CMBS deals going CMBS conduits originating loans for new CMBS deals. Depending forward. On each period end date corresponding with the first day on the originator, it currently takes about three to four months for of each quarter the index will be rebalanced to include all recently CMBS conduits to originate sufficient collateral to create a new qualifying deals as of the relevant Index Review Date3. In the event CMBS deal. During that period, it has been challenging to hedge that the index reaches its maximum of 25 deals, newer deals will deal execution. Existing indices, such as CMBX and TRX.NA. AAA.1, replace the oldest qualifying deals in the index. reference older deals which were written at or near the top of the market and have significantly different risk profiles than CMBS 2.0 The TRX.II.AAA.1 indices trade with quarterly expirations four / 3.0 deals. If cost effective, the new index could help serve as an periods into the future and will have the same expirations as TRX. important catalyst for the further growth of the CMBS market. NA.AAA.1 (Figure 2). Upfront and monthly payments are calculated in the same way as the TRX.NA indices, using Reset Date values that At present our break even analysis shows that TRX.II contracts are are specific to a set of underlying constituents for a given month. biased to the long side of the trade and offer an attractive alternative to investing directly in cash 2.0/3.0 CMBS bonds (Figure 1). Figure 2 Overview of TRX.II Indices Figure 1 TRX.II.AAA.1 Breakeven Analysis (As of 11/15/11) Source: RBS, Markit Figure 3 TRX.II.AAA.1 Transaction Structure Source: RBS, Markit For instance, assuming a current spot spread of 162.3 bps, a Mar12 long position entered into at the offer side still breaks even at maturity in a spread widening scenario so long as spot spreads do not widen more than 15.7 bps to 178 bps. On the other hand, for a Mar12 short position entered into at the bid side to break even at maturity, spreads would have to widen at least 31.7 bps to 194 bps. Source: RBS, Markit A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 45


CRE Finance World, Winter 2012
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