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Repackaging boom lifts CMBS

Re-remics salvage value from battered CMBS.

The US Federal Reserve’s attempts to jump-start the commercial mortgage lending market using its Talf scheme are understandable but misguided. Its initial decision to make just new triple-A CMBS issuance Talf-eligible was optimistic if nothing else, given that there has not been a new CMBS deal in the US for two years. The next step was the inclusion of legacy triple-A CMBS, which certainly stirred the market’s interest. But it was blindsided by Standard & Poor’s announcement on May 26 that changes to its methodology could result in up to 90% of outstanding triple-A CMBS paper – or $235 billion of debt – being downgraded. There is definite interest in buying legacy triple-A CMBS using Talf leverage; the A4 senior tranches of these deals were the thickest in the structure and often have 30% credit enhancement. Even if the loan-to-value ratios have doubled in the past two years, if investors can buy the notes at 70 to 80 cents on the dollar with cheap Talf leverage this is an attractive proposition. The only problem is that if S&P has its way there won’t be many left to buy.

As is so often the case in the bizarre world of structured finance, the solution to the problem is to resecuritize.

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