There are a number of tools to assess CMBS value. The first relates to the language of credit performance itself. Property markets overall remain reasonably disciplined; however, there are two yellow flags. Property price firmness may be overdone, and the authors would underweight the apartment sector. They are also cautious about larger trophy transactions, which have been such a major part of 2003 large loans. The second tool is Credit Drift, a proprietary technique that J.P. Morgan Securities Inc. has been using since 1998. Credit Drift deals broadly with discipline, but it also deals with loan-level real estate issues. The third tool grows out of a study of loan underwriting performance. The authors examine the ten largest underwriters, representing roughly $116 billion out of $156 billion of pre-2002 issuance. While large loans come out favorably with implied lower default frequency, the authors think it is important that investors insist on shadow-rating for most large loans. Historically, structuring in large loan deals provided pooled credit enhancement to protect investment-grade bonds. With the proliferation of A/B notes and rake-like structures, that is much less true today.
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