What is Subordination About? Credit Risk and Subordination Levels in Commercial Mortgage-backed Securities (CMBS)

Abstract

Subordination is designed to provide credit risk protection for senior CMBS tranches by allocating the initial credit losses to the more junior tranches. Subordination level should in theory reflect the underlying credit risk of the CMBS pool. In this paper, we test the hypothesis that subordination is purely about credit risk as intended. We find a very weak relation between subordination levels and both the ex post and ex ante measures of credit risk, rejecting our null-hypothesis. Alternatively, we find that subordination levels were driven by non-credit risk factors, including supply and demand factors, deal complexity, issuer incentive and a general time trend. We conclude that contrary to the traditional view, the subordination level is not just a function of credit risk. Instead it also reflects the market need of a certain deal structure and is influenced by the balance of power among issuers, CRAs and investors.

О Двух Индексах Изменения Рыночного Состояния На Основе Матриц Рейтинговых Миграций

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Extreme Portfolio Loss Correlations in Credit Risk

“…We analyze in detail two non-overlapping credit portfolios that operate on the same market. Moreover we include subordination levels [17,18,19]. At maturity time the senior creditor is paid out first and the junior subordinated creditor is only paid out if the senior creditor regained the full promised payment.…”

Delinquencies, Default and Borrowers' Strategic Behavior toward the Modification of Commercial Mortgages

“…To ensure deal classifications are correct, we cross‐validate Trepp data with securitization data from Commercial Mortgage Alert (CMA) in a fashion similar to An et al . (2015) and manually inspect instances where classifications differ between the two sources to determine the correct pool classification.…”