I am focused on common equity, but am seeing more opportunity to buy distressed agency and private CMBS tranches. Any advice on how to appropriately underwrite?
Fundamentally, I understand it - focus on the cash flow, and on exit it's binary, payoff at par or default. Anything I'm missing is appreciated.
CMBS and CMBSR function on the Bloomberg terminal. Prepayment risk, vacancy rate change risk, rental income change. You need to model for those risks and see if they are in line with your assumptions
Thank you. I guess what I'm asking is there anything else to consider that I wouldn't investing anywhere else in the capital stack (i.e. common equity)? Taking into account all of the underwriting assumptions I just need to be comfortable that the borrower can service all of the underlying loans and doesn't default?
There are many unknowns in the CMBS if you are not in the game, not an underwriter or have access to the research reports. Is it a Conduit or Single Asset / Single Borrower? What tranche are you investing in? I don’t think that approaching such investments by a binary approach (default / no default) is the right way as there might be a partial default, restructuring etc.
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