Representing a departure from the norm for the net interest margin sector, Lehman Brothers has begun marketing a NIM backed by loans to small businesses. While synonymous with the home equity sector, small business loans offer more reliable flows from prepayment penalties, according to a ratings analyst who worked on the deal. A Lehman syndicate official declined to comment on the transaction, as it has yet to close.

The $35 million note is backed by the excess spread and prepayment fee cashflows from a recent $415 million small commercial real estate loan securitization out of the Lehman Brothers Small Balance Commercial trust. One of the advantages of attaching the NIMs to small business loans is that, in comparison to home equity loans, there are few regulations relating to the collection of prepayment fees. "Prepayment fees on commercial loans such as small businesses do not have the various federal and state legal and regulatory issues which apply to consumer loans such as residential mortgages and, as such, the ability to collect prepayment fees is not materially in doubt," wrote Michael McDermitt, assistant vice president with Moody's Investors Service.

Moody's gave the deal full credit for prepayment fee collections, since those fees are not likely to be interrupted by regulatory concerns, according to McDermitt. Credit for prepayment collections from residential mortgage and home equity loans is often given a haircut because regulations may prohibit collection of the full amounts and will therefore not end up in the deal.

Moody's expects to rate the three tranches of the deal at Baa2,' Ba2' and B2.' McDermitt noted one unique factor of the deal is that the N1 and N2 tranches are each supported by their own separate reserve funds. The most junior tranche, the N3, is not supported by a separate reserve fund.

The type of loans securitized in the underlying deal are typically used to purchase or refinance commercial real estate and the bulk of the loans in the deal are first lien positions. The securitization of the loans was made possible by the acquisition by Lehman of CNL-CF Commercial Finance. In that deal, Lehman acquired $500 million in whole loans and servicing rights to CNL-CF's small business loan portfolio.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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