While B-piece buyers have typically found it difficult to get comfortable with all of the subordinate pieces in some CMBS pools, the recent spate of large floating-rate CMBS transactions containing sizeable assets with sub tranches that are not cross-collateralized has made this collateral more palatable to investors, sources say.
Traditionally, it has been harder to sell the bottoms of a floating-rate deal because they have always been transitional properties. However, when sub tranches are treated as specific, individual classes rather than as part of a pool, or if they are not cross-collateralized, it is easier to sell subordinate classes to B-piece buyers who would rather buy specific loans in a pool, leading to better execution on those tranches.
According to a report by Salomon Smith Barney, two recent floating-rate CMBS issues, COMM 2001-FL4 and SBMSVII 2001-FL1, contained larger loans structured with participating triple-B classes that were not cross-collateralized, with most mortgages also containing a further subordinate mortgage note.
Darrell Wheeler, director of CMBS research at Salomon, said this three-level A/B/C variation of the A/B note is becoming more common in large-loan floating-rate transactions because "it enables the issuer to sell the investment-grade mezzanine classes to investors that may prefer specific individual assets but not the full pool."
This variation in structure has also created some interest in the CBO arena that wasn't there 12 months ago.
"These uncrossed triple-B classes are attractive to CBO pools, as the rating agencies treat each uncrossed participation as an individual investment-grade bond for calculating the credit levels of the CBO pool," he said.
Wheeler explained that the A/B/C structure enables a CBO manager to carefully craft their collateral pool and hopefully demonstrate their expertise in actively managing the collateral pool.
"The versatility created by A/B/C notes expands the issuers' execution options, which is why we've seen more of the structure in recent months," he said.