 |
"Having a two-year tail crystallizes risk at a single point in time [year 7 to 9]. This runs the risk that triple-A bonds could be downgraded to D if the assets cannot be sold within this timeframe" |
There is nothing like a solid bout of negative headlines in a related asset class to concentrate the mind. While the great and the good have been opining on the state of the residential mortgage market – both in Europe and the US – the commercial real estate market seems to have dodged much of the scrutiny. But real estate lending has witnessed a similar phase of aggressive lending, huge NAV growth and high loan-to-value multiples, and a correction has long been on the cards. Some of the volatility in the lower-rated ABX indices spread to the CMBX in late February, with the double-B CMBX index widening 100 basis points in one day on February 27. The worry for any CMBS investor is that the pool will have to be unwound quickly in fire-sale conditions. And the structures of the earlier CMBS transactions in Europe greatly increased the risk of this by incorporating a relatively short tail period.
