CMBS B-Piece Buyers

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I'm looking to learn more about the B-Piece buying space. How do funds value a b-piece? Do they get involved with the owner/operator in the event of a default or need of a turnaround? Are they required to hold for the entire 10 yr period? Are agency b-piece buyers separate from buyers of BB CMBS b-pieces or are they typically housed in the same group at the hedge fund / asset manager? Are the skills transferable to different RE jobs or do people stay in the space once they are there?'

I know its annoying to launch a bunch of questions like that so feel free to ignore the above. If someone has a book/website that is a good introduction to the space that would be helpful. Or If you have experience selling b-pieces at an Agency or BB / buying b-pieces at an asset manager, have a friend that works in the industry etc. please chime in. Any insight is appreciated

Comments (8)

 
Sep 19, 2017 - 2:17pm

CREFC Primer has a section on b-piece investing. bidders/buyers target an IRR (0% losses, 0CPR, no defaults, no extensions, etc), min thickness of non-investment grade classes and non-rated, and other factors.

the buyer will remove loans it feels can be a problem from the pool early on.

each shop has their own internal models/views on different loans and how special servicing might be able to benefit as well.

 
Sep 19, 2017 - 5:51pm

Most CMBS B Piece buyers have a captive special servicing arm so yes, they very much get involved with the owner/operator in case of default/workout (think Rialto, LNR, etc.). CMBS B Piece buyers are generally PE groups who have rasied B Piece funds and typically need to hit high teens returns due to their relatively high cost of capital. Based on new risk retention rules, the expectation is that CMBS B Piece buyers will hold until maturity. Agency B Piece buyers are typically investment arms of large multifamily operators/developers (think Berkshire Group, Related Companies, etc.). There is very little overlap between Agency and CMBS B Piece buyers as the risk and return profiles of the investments are completely different. Yes, the skills for underwriting Agency and CMBS B Piece transactions are similar and transferable to any type of role that requires underwriting or valuation experience.

 
Best Response
Sep 19, 2017 - 11:50pm

How do funds value a b-piece? they get a fat coupon (say 15%ish) each year. However, they assume that throughout the hold period, there will be defaults and foreclosure, underwrite the pool on their own terms, and then value the proceeds from foreclosure as well as the ongoing value of their bonds after the pool takes some hits. They can then make assumptions or bets on whether or not defaults will happen, what they think their risk-return is, and compare to comparative investment opportunities (sorry for the double compare use)

Do they get involved with the owner/operator in the event of a default or need of a turnaround? No (but see @jackstraw001 response for exceptions). If a loan goes into default it transfers to what's known as the special servicer. Usually before a loan defaults it will go through several stages of loan structure. The first is usually a cash trap - say around 1.15x DSCR. where all cash flow after debt service is held in a separate account benefiting the lender until they reach certain triggers that allow the cash to be released. The second is a management kickout, at which point the special servicer will select a new manager to hopefully turn the property around. The b-piece only touches the property after foreclosure - although some b-piece buyers are inclined to turn the property around and sell it at a higher value than that which the property would have at foreclosure, some just sell as-is to recoup investment.

Required to hold for the entire 10 yr period? My understanding is yes and no. Someone (can be a b piece buyer, the issuer, or any bond buyer) must hold 5% of the notional value of the pool for maturity. This can be a vertical strip (AAAs through unrated) or a horizontal strip (all unrated through maybe some BB or BBB- pieces depending on how the agency rates the pool). Issuers have experimented with just about every structure, however the investment grade bond buyers typically will not agree to this because this makes the asset class illiquid, typically going against the fund's investment structure which is agreed upon with their LPs.

Are agency buyers separate? They can be. Some operate in both spaces, some are exclusive.

Are the skills transferable? Yes. However, unfortunately, it's very easy to get pigeonholed in real estate. Despite (in my opinion) real estate analysis being a very transferable skill across all facets of the industry, it's harder than you might think to move around. It may be a little harder to move on from a b-piece because you are limited in your exposure to different groups. You'll be primarily working with lenders.

Refer to the other answers as well. All seem to be correct to me.

 
Sep 20, 2017 - 11:46am

Technically speaking, lower rated tranches don't get materially higher coupons - they are sold at incrementally larger discounts to face value the more junior you go that drive incrementally higher yields

 
Sep 20, 2017 - 12:03pm
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