ValueXpress advised its affiliate, Country Bank, on the purchase of $71 million of CMBS securities in 2013 that included 19 separate transactions from 18 CMBS issues. Each of the 18 issues was analyzed in detail by ValueXpress under the direction of Jim Brett, head of CMBS analytics.
“At the pool level we study asset quality, Debt Yield, Net Cash Flow, DSCR, LTV and sponsorship,” explained Brett. “In addition, we model the cash flows for the top ten loans in the pool, which typically exceed 50% of the overall loan balance in the issue. The results must exceed our hurdles before we recommend for Country Bank to purchase CMBS from a particular issue.”
“Approximately 75% of the purchased CMBS were Class B bonds, while the balance was Class AS bonds,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Careful analytics are very important, as these classes are not the most senior bonds, and although the yield is juicier, subordination levels (the point at which the bonds can take principal losses from defaults on the underlying loans) are lower than senior CMBS. The average subordination level on our Class B bonds in 15%, the point at which principal losses would occur. However, we project that the losses on the loans supporting our purchased CMBS will never exceed 5%, providing a strong cushion against any principal losses.”
The CMBS investment program, started in 2008, has been very successful for Country Bank, allowing it to profit from rising CMBS values in 2009-2010 through a divestiture program during the period, and providing relatively high yields on bonds purchased in 2012-2013 that are now being held to maturity.