DO POOLING AND TRANCHING AFFECT YIELD SPREAD OF CMBS?

Abstract

This study examines how the pooling and tranching processes affect yield spreads of CMBS through analyzing the individual mortgage loan characteristics, distribution and concentration factors as well as the deal level characteristics in every CMBS deal. Past studies have concentrated their discussion on the deal level characteristics such as loan-to-value ratio (LTV) and debt service coverage ratio (DSCR) and found that they play a part in explaining for the CMBS yield spreads. However, the study has empirically found out that they are not statistically significant in explaining for CMBS yield spreads. In addition, the study fills the gap in previous research by looking into the individual mortgage loan characteristics. Yield spreads on CMBS are determined or influenced by a variety of factors and often, it is hard to evaluate because commercial mortgages are more complex instruments. As an extension to Maris and Segal (2002) and Titman, Tompaidis Tsyplakov (2005), the results showed that yield spreads can be determined by different factors at origination and current cut-off date. It is important for credit agencies and investors to know the determinants to predict the unique risks involved in the pooling and tranching process. While there is enticing opportunities to pick up spread, the risk of investing in subordinated CMBS should be weighed against the incremental spread. The paper has looked into the different loan and deal level characteristics to find out the determinants of original and current yield spread. Generally, loan term of 10 years (LT10) and deal-level variables such as mean cut-off coupon (MCOCPN) and the original value (OrgValue) are good determinants for the original yield spread, while the current value (CurValue) and current WAC (CurWAC) are good determinants for the current yield spread.