CMBS B piece acquisitions
Coming from acq and dev, is this a good space to build a career in? Is long term pay strong? Is the work interesting?
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Can someone explain what a CMBS b-piece is? Is it just a tranche below the most senior? Ie more risk more reward?
Basically, yes. It's a junior tranche that usually captures the residual cash flows after the A investor.
Thanks. Out of curiosity, what sort of returns can you expect on both the A and B pieces of CMBS in today's market? Never worked with them before so I'm a bit unfamiliar with them.
B Piece is the lowest rated tranche in the stack of (multiple) tranches sold out of a CMBS offering. It also would carry the highest return. The B Piece buyer has to hold I believe for 5 years? They can't just go buy the strip and trade out of it. This is a skin in the game requirement.
In exchange for having a required hold period, and having the highest exposure to loss, the B Piece investor receives more rights and can really drive and influence the shape of a CMBS transaction before it is finalized given the transaction can't get off the ground without it (B buyer is a regulated requirement in nearly all CMBS transactions). Its rights extend much further than the rights of investors in the higher rated tranches.
Great learning environment if you're talking about a role in private label conduit CMBS. You see a lot of properties, sponsors, markets, leases, financial statements. The amount and quality of data you see gives you valuable insight in a relatively short amount of time. You're able to get under the hood and pick up on a lot of trends. For most shops it's primarily a credit role. CMBS credit's analytical methods are pretty developed at this point, so once you learn and internalize it, it becomes a tangible and portable skill set. Whether it's interesting or not long term is a personal question. I am very grateful for having the opportunity to do it but ultimately didn't think anything more of it than just an excellent early career learning experience. Will add that conduit CMBS origination volume is effectively non-existent right now and hasn't recovered since the pandemic. Feel free to PM me if you want to discuss further.
Was just listening to a lender panel with TPG, SocGen, et.al It was almost unanimous that the biggest places for losses right now are in the CMBS and CMBS-B piece space.
Yeah a lot of shitty, massive office buildings were financed with CMBS. Even some A pieces have been getting wiped out. Total blood bath
Is cmbs mark to market daily like stocks essentially?
I think I can lend some insight here. Currently working for a major B-piece buyer and have developed several CMBS valuation models.
In general if you are a B-piece buyer you hold your bonds to maturity (that being said, at the 5+ year mark bonds are sometimes sold opportunistically). As another commenter noted, these bonds are first-loss and can quickly get eaten through when a single large loan defaults and losses are realized. Either way most firms, due to the hold period and given ample timing from origination to purchase, underwrite every loan in the pool. The underwriters anticipate a loss date and severity and apply that data throughout the life of the pool. Once those losses are applied, the reduction in principal balance and future debt service payments helps you understand the value of your B-piece. Let me know if you have any specific questions - happy to answer them.
Yeah couple quick Q’s
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