Conduit CMBS - Analysis / Underwriting

Based on the most helpful WSO content, here are some key points to consider when analyzing and underwriting conduit CMBS:

1. Property Cash Flow Underwriting and Valuation:

   • CMBS outcomes are often binary, meaning the techniques used for granular pools of residential loans may not apply well to CMBS.
   • Focus on property cash flow underwriting and valuation, especially for single asset exposures or conduits heavily weighted on the top 5 or 10 loans.

2. Analyzing Top Loans:

   • Given the complexity of conduit deals backed by multiple loans, it's common to sort loans by size and analyze the top 10 by allocated balance.
   • This helps in understanding the major contributors to the pool's performance.

3. High-Level Metrics:

   • Look at high-level metrics such as vintage/origination year, asset type exposure, debt yield, and cash flow coverage.
   • These metrics provide a snapshot of the overall risk and performance potential of the conduit deal.

4. Stress Testing:

   • Conduct stress testing on CDR (Cumulative Default Rate), loss severity, and CPY (Cumulative Prepayment Yield) assumptions.
   • Analyze how changes in these assumptions impact yields and credit support to gauge the resilience of the deal under different scenarios.

5. Flexibility and Structuring:

   • CMBS deals typically do not favor volatility or future funding and have strict structuring requirements.
   • The servicer often has approval rights over large leasing decisions or capital expenditures, and there may be a lockbox for rent collection.

6. Prepayment and Defeasance:

   • Understand the prepayment terms, which are typically defeasance for CMBS.
   • This can impact the flexibility and cost of refinancing or selling the property.

By focusing on these aspects, you can better assess the quality and risks associated with a conduit CMBS deal.

Sources: So you want to work in CRE Debt? Here are the options..., How to think about Debt for Acquisitions, How to think about Debt for Acquisitions, Math behind pricing a CMBS loan, Investment Sales Vs. Debt/Equity Brokerage