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.