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CMBX Lowers Quality To Attract Investors
Total Securitization -- Institutional Investor News (October 27, 2006)

CMBX, the commercial mortgage-backed securities derivatives index, rolled last week and dealers took the opportunity to add BB-rated credits in a bid to attract new investors. The idea is that extending the range of the index-until last week it referenced AAA to BBB credits-will increase relative-value trading opportunities and bring new investors to the index.

The credits in CMBX 2 have lower subordination levels, higher loan-to-value ratios and higher debt-to-service coverage ratios. Traders said that as a result they expect the new index to trade between five and seven basis points wider than the first set.

A popular trading idea from sales desks across the Street has been selling protection on the CMBX 1 and buying protection on CMBX 2. Another trade that is being recommended is selling protection on BB credits while buying protection on the BBB minus slice of the index. This position is attractive as it is a positive carry. The investor collects the higher spread for selling protection on the BB bonds while paying the lower spread on BBB. In the event of widespread deterioration in the commercial real estate market, losses will eat through the BB and BBB minus bonds, but still be covered.

Samantha Rowan
Managing Editor
Real Estate Finance & Investment
Securitization News
(212) 224-3996



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