A commercial mortgage back security CMBS is secured ona set of
properties worth a total of $500 million, and its total outstanding
balance is $400M. There are three tranches in this CMBS: a senior
tranche with an outstanding balance (OSB )$200M, messanine tranche
with OSB $150M and a junior tranche with OSB $50M.
a. What LTV ratio in a first mortgage whole loan issuance would
correspond to the default risk structue of each tranche?
b. How do the risk structures of the messanine tranche and junior
tranche differ from that a first-mortgage whole loan issuance with
the same LTV ratio?
c. The WAC for the entire CMBS is 11% per year. The senior tranche
commands a coupon of 6% per year, the mezzanine tranche commands a
coupon of 10% per year, and the junior tranche commands a coupon of
15% per year. Assuming no default, how much money is left each year
after all par-valued tranches have been paid off, and what can the
CMBS issuer do with this money
A) LTV Ratio = Loan to Value Ratio
= Total Outstanding debt /Total Value of security
= $ 400 million / $ 500 million
= 0.80 or 80 %
C) Weighted average cost = Outstanding balance x WAC
= $ 400 Million x 11 %
= $ 44 Million
Coupon cost = (200 x 6% ) + (150 x 10 %) + (50 x 15%)
= (12+15+7.5)
=$ 34.50 Million
Money left = 44-34.5
= $ 9.50 Million
CMBS can with left money increase its wealth for its share holders.
B)
A Senior tranche occupies 50 % space in the total secured loans ( $ 200 M / $ 400 M)
Messanine Trnche occupies 37.5 % Space in the total secured loans ( $ 150 M / $ 400 M)
A Junior tranche occupies 12.5 % space in the total secured loans ( $ 50 M / $ 400 M)
The first Tranche i.e. Senior tranche occupies 50 % space in the total secured loans where as Messanine tranche occupies 37.5% and junior tranche occupies 12.5% space in the total secured loans.
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