With interest rates expected to increase, floating-rate transactions will probably attract more CMBS investors. As a result, it has becoming a focus for some market participants.

In a recent report, Lehman Brothers said that the primary risk in CMBS floaters remains default risk. However, considering how lumpy floating-rate pools usually are, default rates have very limited use in evaluating floating-rate deals. There is no better alternative than to evaluate the risk of default on a loan-by-loan basis, said analysts. "While the same should also hold for prepayments and extensions, it's a lot more difficult to attach a probability of prepayment or extension to a particular loan," they wrote. "Hence, we provide some historical context to the prepayment and extension experience on floating-rate pools, with a view toward helping investors finetune their assumptions while evaluating floating-rate securities."

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