Tuesday, November 5, 2024

That sinking feeling in the CMBS market

 


Sometimes you get hit with a wave, but often you drown because the water level just gets too high and you don't have the energy to find the shore, or worse, there is no shore. There is a problem in the CMBS problem with some very good properties underwater with the sinking still occurring. We can start with the issue of running a CMBS on a single property. There is no diversification. Investors may expect that lower rated tranches will have more credit risk, but in these cases, we are seeing risk with the A tranche. Ouch. This is what is supposed to be avoiding with structuring. A combination of poor engineering with a bad environment spells disaster for investors. 

Can there be money to be made? Yes, however, it is not from dropping these bonds in a portfolio and cutting some coupons. This is risky bond trading. 

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