Comes courtesy of Moody’s, which says it has now rated nine CMBS resecuritisations.
The trend, according to the agency, started in July and has been bolstered by the massive ratings uncertainty surrounding the sector.
Here’s a bit more detail:
Recent divergence in rating agency outlooks with respect to commercial mortgage backed securities (“CMBS”) performance has led to a surge of interest in carving single-tranche super-senior Aaa CMBS bonds into senior and junior components. Aaa investors have rushed to use this technique as a partial hedge against the risk of ratings downgrades in their Aaa holdings. Others are seeking to arbitrage the difference in yield between the underlying CMBS bonds and the resecuritization bonds.
Typically, such resecuritisations involve the issuer carving up the most subordinate super-senior bond class (the A4 super senior bit, at left) into junior and senior components. As a reminder, the most subordinated super-senior class is the last super-senior bond to be paid out of principal amortisation and recoveries, but ranks pari passu (equally) with other super-senior tranches when it comes to allocating losses.
The tranche usually comprises something like 70 per cent of the bond structure, and therefore has 30 per cent credit enhancement, or protection, to absorb losses in the underlying loan pool.
In a resecuritisation, that A4 tranche is typically carved up into a senior tranche representing 72 per cent of the resecuritisation, and a junior tranche representing 28 per cent, according to Moody’s. And presto — you get a senior resecuritisation tranche with 50 per cent credit support and a junior one with 30 per cent.
Building more credit enhancement into the structure, in theory, is meant to further protect holders of the tranches from defaults in the underlying bond pool.
If this all sounds familiar, it’s because, well, it is.
We’ve noted before, that in the first half of this decade issuers reacted to declining average levels of credit enhancement (15.5 per cent by 2004) by tranching the `AAA’ portions of CMBS deals into senior tranches with circa 20 per cent credit enhancement and junior tranches with lower levels of credit support.
Those senior ‘AAA’ tranches eventually became known as super senior tranches.
The more things change, the more they stay the same, eh?