Question

CMBS B-piece buyers were, from 2005-2007, able to greatly reduce or completely eliminate their risk exposure that they held as owners of first-loss / subordinate bonds. How did they do this?

Answer 1

B –piece buyers:

In 2005, the traditional B- piece buyers understood their role as the most junior non investment grade investors & they conducted their own due diligence & re-underwriting to assure themselves of the prudence of their investments in the risky first loss position. They required & obtained full information about the borrower, the property, the leases & cash flow, the loan, all third party & originator reports on borrower & guarantor credit & the collateral as well as the lender’s underwriting. Because they understood the inherent risk of the most subordinate investor position in the CMBS trust, the due diligence & re-underwriting they undertook was far better than those undertaken by the primary mortgage lenders – securitized & more similar to the junior mortgagee.

This is said to be horizontal risk retention which is the first loss to the most subordinate class in the CMBS & is held by B-piece buyer.

Thus the B-piece buyers are considered to be real gatekeepers because the B-Piece buyers focus on the experience & expertise on understanding & managing the risk associated with each asset in the CMBS trust.