In 2005 the rate of refunds in CMBS transactions increased sharply

Waves of advance payments and the increase in the share of the debt (leverage effect) have made riskier securitization structures, pushing to the adaptation of the mounts.

Leveraged loans

The emergence of loans to leverage strong effect 70-80 of the value of the asset against 50 or 60 previously with more limited capital inflows made their securitization for economically less viable banks. These more risky loans have increased the share of securities rated in the speculative category by rating agencies, more costly to the Bank and more difficult to place because of their risks.

"A new trend in the market of CMBS loans senior part (A loan), which will be securitized in a show of CMBS and junior portion (loan B) divide, more risky, which will be either retained by the Bank, to specialized investors", explains Antoine Corpet, analyst at Moody's. This is what is called A/B used structures, for example, in operation Eloc 21 (327 million euros) of Morgan Stanley (see opposite) and that emerge in Europe since last year. For the Bank, interest is that the junior loan will generally have a margin less than the "spread" of a slice subordinate CMBS noted Ba or (b).

However, several problems in terms of the subordination of the investors default of repayment of the credit. Some A/B structures are very favourable to A Lender, but others give more rights to the Lender B. Even though they are subordinate to investors "investment grade", they were able to obtain the right to play the warranty and sell the property or default of the borrower to repay the credit in his place, which prevents A lender to make the guarantee.

Advance payments

The prepayment of loans by inter-bank competition also challenge the approach of subordination between investors. A few months, a loan can be refinanced with a gain of several tens of basis for a borrower points. "In 2005, the rate of refunds in CMBS transactions increased sharply." "It is not uncommon to see 50 of the loans be prepaid during the first year of a transaction", said Antoine Corpet.

However, traditionally, investors are reimbursed as "sequential", in other words the instalment generally noted, the most senior Aaa, receives rebates in priority to the subordinated tranches. But a sequential structure is not always economically viable for the arrangeuse Bank as rebates will be assigned first to holders of securities at low margins. This has the effect of increasing the average margin of the transaction (in proportion, there are more titles with high margins to pay investors), which reduces the performance of the transaction for the Arranger.

"One of the banks is to introduce a mechanism AFC ("available fund cap") to take account of the consequences of repayments on loans." "This type of technique can make bear to the subordinate classes the decrease in the cash flow generated by repayments in certain structures," explains Jean-Norbert operator, lawyer partner in Lovells.

One of these mechanisms, the "adjusted interest amount", is to limit the amount of interest served in junior investors in what remains available structure once paid what it was.

"Another, the"residual amount interest", is the method of sequential payments." "In this case the amount of available interest will be distributed not in priority to the senior class but prorated amounts invested between all classes before the underlying failure", said Gilles Saint-Marc, lawyer partner at Gide. If the pool of loans becomes more risky following the repayment of a loan of good quality, the senior lender will thus be more exposed. The arrangers came to mixed rules between sequential to the benefit of senior lender and rated for subordinates.