With the COVID disruption, can someone please shed some light on how Non IG CMBS tranches are being valued. Specifically when the performing BBB- tranches in Feb, are being bid at distressed levels, whats the guidance on the subordinate tranches.Would love to hear thoughts on how it should be done and how it is being done.
Thanks in advance.
It’s still so dislocated up and down the capital stack. People are still trading based on dollar price, and deals with significant exposures to retail and hospitality are taking the biggest hits.
overtimeRequired can you speak a little more about trading based on dollar price vs spreads over a benchmark ! How do traders come up with a price ? specifically in this environment.
So you have funds or mortgage reits that invest in securities (Cusips for CMBS, SASB and CRE CLO). They often will leverage these securities through a warehouse line or through repurchase agreements. Should the value of the cusips decline in value, there is a margin call where the borrower (fund or reit) will have to post more collateral. If they fail to post the collateral, the Bank will seize and sell the securities to pay off the warehouse line.
Towards the end of March, there was a ton of forced selling related to this leverage, and as these instruments were liquidated, prices continued to decline. Take a look at Exantas for example - they suffered a $180mm loss related to the sale of their securities portfolio and had to lay off a ton of staff. This forced selling continued to push prices for the securities down, which already exacerbated the lack of liquidity in the secondary market.
Thank you, so it would be right to say that the price is a stressed sale ( liquidation value) vs a present value of forecasted cash flow with some assumptions on collateral performance.
Would love to know more here too.
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