Carving Up the 'AAA' Class: Credit Neutral to All.Business Editors NEW YORK--(BUSINESS WIRE)--April 23, 2004 Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. expands and clarifies the 'AAA' carve out Carve out Usually occurs when a company decides to IPO one of their subsidiaries or divisions. The company usually only offers a minority share to the equity market. Also known as equity carve out. class structure discussed in an earlier press release. Commercial mortgage-backed securities Commercial mortgage-backed securities (CMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on commercial rather than residential real estate. (CMBS CMBS See: Commercial Mortgage Backed Securities ) issuers, for certain transactions, will carve up the 'AAA' class into two or more classes ('carve-out certificates'), usually A-1, A-1A, A-2, etc. (collectively, the class A certificates). Fitch states such structures are credit neutral, due to the structural features discussed here. The A-1A class typically represents the carve-out certificates. Two distinct loan groups are created within the trust: Loan Group 1 consists of loans secured by only multifamily and manufactured housing Manufactured housing (also known as prefab housing) is a type of housing unit that is largely assembled in factories and then transported to sites of use. In the United States, the term "manufactured home" specifically refers to a house built entirely in a protected communities and Loan Group 2 consists of loans secured by all commercial property types and may include some multifamily and manufactured housing. All principal paid by Group 1 is used to pay principal on the A-1A certificates and all principal paid by Group 2 is used to pay principal on the remaining class A certificates. Once the A-1A or the A-1, A-2, etc. certificates are reduced to zero, principal from Loan Group 1 or Loan Group 2, respectively, will be used to pay down any outstanding principal on the remaining class A certificates and then the lower rated certificates, in sequential order. Interest from Loan Group 1 will be allocated to the A1-A certificates and interest from Loan Group 2, will be allocated to the remaining class A certificates, and then interest will be paid down the waterfall waterfall, a sudden unsupported drop in a stream. It is formed when the stream course is interrupted as when a stream passes over a layer of harder rock—often igneous—to an area of softer and therefore more easily eroded rock; the edge of a cliff or sequentially. In the event that there are insufficient funds available to pay the scheduled distributions on all the class A certificates, the scheduled distributions will be paid pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. without regard to loan group. All losses are structured to flow up the waterfall in reverse sequential order exactly like a standard sequential pay deal. If losses were to reach the class A certificates, they would be applied pro rata based on outstanding balance. Since losses are assigned pro rata, if any of the 'AAA' certificates were to take a loss, the entire 'AAA' class would also take a loss. Given this structure, in Fitch's opinion, carving out carving out Managed care adjective Referring to the practice of allowing healthy persons in small employer groups to buy lower cost health insurance policies, while workers who are sicker must buy more expensive high-risk pool coverage certain loans to support specific 'AAA' certificates does not create any additional credit risk. This is similar to the time tranching of 'AAA' classes that is common in most CMBS transactions. Critical to Fitch's analysis is the fact that the loans support all classes with no separation for the certificates rated 'AA+' and below. For example, the remaining principal and interest available from Loan Groups 1 and 2, after paying the required 'AAA' class distributions, are used to pay the required principal and interest on all the remaining classes. In transactions where separate loan groups support various certificates with multiple ratings, the subordination levels are materially higher than for a transaction supported by commingled collateral. The potential concern of having the non-carve-out class A certificates secured by different loan groups has been mitigated by the allocation of losses and principal distributions within the waterfall. This will serve as a replacement for the 'Fitch: No Premiums, No Difference To U.S. Issuers of Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. Carve-Out Certificates' press release dated March 29, 2004. |
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