What is a CMBS B-Piece?
When CMBS loans are pooled together to create commercial mortgage backed securities, these securities vary in credit quality and payment priority. Typically, they are divided between investment grade securities, (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). While the A-class bondholders are paid first, B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Due to their higher risk, however, B-piece CMBS offer investors significantly higher returns when compared to A-rated CMBS.
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CMBS B-Pieces: What You Need to Know
When CMBS loans are pooled together to create commercial mortgage backed securities, these securities vary in credit quality and payment priority. Typically, they are divided into several different tranches, which can broadly be grouped into two categories; investment grade securities, (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). While the A-class bondholders are paid first, B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Due to their higher risk, however, B-piece CMBS offer investors significantly higher returns when compared to A-rated CMBS.
How the CMBS B-Piece Market Affects CMBS Borrowers
While the discussion of bond credit classes may not seem relevant to the average commercial real estate investor interested in taking out CMBS financing for their property, it’s more relevant than one might think. B-pieces represent a large amount of the actual commercial mortgage backed securities that are sold, so, the availability and price of CMBS loans is directly related to the market demand for these securities. While CMBS risk-retention rules have shifted the market somewhat, the impact has not been negative— at least not yet. The new rules, which stem from the Dodd-Frank Act, mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years. This means that hedge funds and other players who were actively trading B-piece securities can no longer do so.
Related Questions
What is a CMBS B-Piece loan?
A CMBS B-Piece loan is a type of commercial mortgage-backed security (CMBS) that is divided into two categories; investment grade securities (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation, but they receive higher returns when compared to A-rated CMBS. Furthermore, both A-class and B-piece CMBS are divided into multiple tranches themselves. CMBS risk-retention rules, stemming from the Dodd-Frank Act, mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.
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Source 4What are the benefits of a CMBS B-Piece loan?
The benefits of a CMBS B-Piece loan include higher returns for investors when compared to A-rated CMBS, as well as the potential for a quicker closing process. B-piece CMBS are typically sold to hedge funds and other investors who are willing to take on higher risk in exchange for higher returns. Additionally, since B-piece buyers are not required to hold onto their investment for a minimum of 5 years, as is the case with A-piece buyers, the closing process for CMBS B-Piece loans can be quicker.
What are the risks associated with a CMBS B-Piece loan?
The risks associated with a CMBS B-Piece loan are higher than those associated with A-rated CMBS. This is because B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Additionally, the Dodd-Frank Act mandates that B-piece CMBS investors keep their bonds for at least five years, meaning that traders and hedge funds can’t merely purchase these riskier securities to trade them later. This means that CMBS lenders have needed to uphold stricter underwriting standards than they did in past years (i.e., in the run-up to the 2008 financial crisis).
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How does a CMBS B-Piece loan differ from other commercial real estate loans?
CMBS B-Piece loans differ from other commercial real estate loans in several ways. First, they are part of a larger pool of loans that are grouped together to create a commercial mortgage-backed security (CMBS). These securities are divided into two categories; investment grade securities (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). A-class bondholders are paid first, while B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Additionally, B-piece CMBS offer investors significantly higher returns when compared to A-rated CMBS. Finally, CMBS risk-retention rules, which stem from the Dodd-Frank Act, mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.
What are the requirements for obtaining a CMBS B-Piece loan?
In order to obtain a CMBS B-Piece loan, borrowers must meet certain criteria. Generally, these criteria include:
- A minimum loan size of $10 million
- A minimum loan-to-value ratio of 65%
- A minimum debt service coverage ratio of 1.25x
- A minimum loan term of 5 years
- A minimum interest rate of 5.5%
Additionally, borrowers must meet the requirements of the CMBS risk-retention rules, which mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.
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