Commercial mortgage-backed securities are divided into tranches that pay off only when the tranche above has been paid. As issues do not have borrower recourse, the market is characterized by detailed rating agency analysis and investor due diligence. The main criterion used to evaluate deals are the loan-to-value (LTV) ratio. In addition, debt service ratio and interest coverage ratio are also frequently used.
The tranching of a deal is an indication of the quality of the assets underlying it.
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