One loan, one property, and a capital structure cut at the debt yields the rating agencies require on their own cash flow.
In a single-asset single-borrower (SASB) CMBS each class is sized so that the rating agency's net cash flow, divided by the cumulative balance of that class and everything above it, meets the debt yield the rating requires. On an illustrative $600.0M loan with $42.0M of agency NCF and a 13.00 per cent AAA threshold, the AAA class is $42.0M / 13.00% = $323.08M, 53.8 per cent of the loan, with 46.15 per cent credit enhancement beneath it. Size it on the issuer's $48.0M instead and the AAA class is $46.15M too large.
Worked in full in CMBS and CRE CLOs by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A conduit is a pool of dozens of loans, and its subordination comes from loss models run across the pool. A SASB deal is one loan, usually floating rate and interest only, on one asset or one portfolio. There is no diversification to model, so the agencies look straight through to the property: what cash flow they believe in, and how much debt that cash flow can carry at each rating level. The answer is expressed as a debt yield per class, sometimes alongside an agency loan-to-value, and the capital structure is the loan cut at those debt yields.
The deal below is fictional and every threshold is illustrative, chosen to show the mechanism rather than to quote any agency's criteria.
| Input | Value |
|---|---|
| Mortgage loan, floating rate, interest only | 600.0 |
| Issuer underwritten net cash flow | 48.0 |
| Issuer debt yield | 8.00% |
| Agency haircut to issuer NCF | 12.5% |
| Agency net cash flow | 42.0 |
| Agency capitalisation rate | 8.25% |
| Agency value, NCF / cap rate | 509.09 |
| Agency debt yield on the whole loan | 7.00% |
The haircut is the agency's own view of the cash flow: market rents instead of in-place ones where leases are above market, a higher vacancy, a management fee, reserves for capital expenditure and leasing costs. On a well-let portfolio it may be a few points; on a transitional asset it can be twenty or more. It is the single input that moves the structure most, as the sensitivity below shows.
Maximum cumulative balance through a class = agency NCF ÷ minimum debt yield for that class's rating
Class size = its maximum cumulative balance − the cumulative balance of the class above
Credit enhancement = 1 − cumulative balance through the class ÷ loan
Excel, with agency NCF in B1, the loan in B2 and thresholds in C5:C10: =MIN($B$1/C5,$B$2) for the cumulative balance, and =D6-D5 down the column for the class sizes.
Step 1, the agency cash flow. $48.0M less a 12.5 per cent haircut is $42.0M. On the whole $600.0M loan that is a 7.00 per cent debt yield, against the issuer's 8.00.
Step 2, the AAA class. At a 13.00 per cent threshold, $42.0M carries $323.08M of debt. That is class A.
Step 3, every class below it. Repeat at each threshold. Through BBB− at 9.00 per cent, $42.0M carries $466.67M cumulatively; the A− level carried $409.76M; so class D, the BBB− class, is $56.91M thick.
Step 4, the residual. Whatever the B− level cannot carry, $600.0M less $579.31M, is the unrated bottom class, labelled HRR in the table: $20.69M.
| Class | Rating | Debt yield threshold | Cumulative balance | Class size | Credit enhancement | Agency LTV at detachment |
|---|---|---|---|---|---|---|
| A | AAA | 13.00% | 323.08 | 323.08 | 46.15% | 63.5% |
| B | AA− | 11.50% | 365.22 | 42.14 | 39.13% | 71.7% |
| C | A− | 10.25% | 409.76 | 44.54 | 31.71% | 80.5% |
| D | BBB− | 9.00% | 466.67 | 56.91 | 22.22% | 91.7% |
| E | BB− | 8.00% | 525.00 | 58.33 | 12.50% | 103.1% |
| F | B− | 7.25% | 579.31 | 54.31 | 3.45% | 113.8% |
| HRR | NR | - | 600.00 | 20.69 | 0.00% | 117.9% |
Investment grade reaches $466.67M, 77.8 per cent of the loan, and $133.33M, 22.2 per cent, sits below it. The agency LTV column is the cross-check: the AAA class detaches at 63.5 per cent of the agency's value, and the loan as a whole is 117.9 per cent of it, which is not unusual for a SASB, because the agency value is a stressed number and the loan was sized on the sponsor's appraisal.
Credit enhancement here is read exactly as in a conduit, the share of the loan junior to a class; the arithmetic is in how credit enhancement is calculated in CMBS. What differs is where it comes from: one property's cash flow rather than a pool's loss distribution.
| Haircut | Agency NCF | AAA class | AAA credit enhancement | Investment grade | Below investment grade | HRR |
|---|---|---|---|---|---|---|
| 5.0% | 45.60 | 350.77 | 41.54% | 506.67 | 93.33 | 0.00 |
| 10.0% | 43.20 | 332.31 | 44.62% | 480.00 | 120.00 | 4.14 |
| 12.5% | 42.00 | 323.08 | 46.15% | 466.67 | 133.33 | 20.69 |
| 15.0% | 40.80 | 313.85 | 47.69% | 453.33 | 146.67 | 37.24 |
| 17.5% | 39.60 | 304.62 | 49.23% | 440.00 | 160.00 | 53.79 |
Each point of haircut removes $3.69M of AAA and moves the same cash flow down the stack into classes that cost the sponsor more. At a 5.0 per cent haircut the B− threshold could carry more than the whole loan, so the unrated piece disappears; at 17.5 per cent it is $53.79M. This is why sponsors and arrangers argue the agency cash flow line by line before any spread is discussed: the haircut decides the blended cost of the bonds, and through it how much the loan can pay away.
Dividing the issuer's NCF by the thresholds. $48.0M over 13.00 per cent is $369.23M of AAA, 61.5 per cent of the loan against 53.8 per cent, and investment grade runs to $533.33M, $66.67M more than the agencies will rate. The issuer's figure is the sponsor's underwriting; the thresholds are calibrated to the agency's own, lower cash flow. Mixing the two produces a structure that looks cheap in the term sheet and is re-cut when the rating feedback arrives.
The unrated class is not automatically the risk retention piece. $20.69M is 3.4 per cent of face, and a horizontal retention has to be worth 5 per cent of the fair value of all the classes, which is one reason SASB deals commonly retain a vertical slice instead. The fair-value test is worked in how CMBS risk retention is calculated.
The book's own deal is a conduit, and the free workbooks for this book compute its credit support from the stack rather than typing it in; the refinancing workbook tests debt yield, loan-to-value and coverage together on a single loan, the same three lenses a SASB is cut with.
It depends on the agency, the property type and the asset's quality, so treat any single figure as illustrative. The mechanism is fixed: the AAA class can be no larger than agency NCF divided by the AAA debt yield. With 42.0M of agency NCF, a 13.00 per cent threshold allows 323.08M; a 12.0 per cent threshold would allow 350.0M.
The agency rebuilds the cash flow on its own assumptions: market rather than in-place rents, a higher vacancy, a management fee and reserves for capital expenditure and leasing. In the illustration a 12.5 per cent haircut cuts 48.0M to 42.0M, which lowers the whole-loan debt yield from 8.00 to 7.00 per cent and removes 46.15M from the AAA class.
A conduit's subordination comes from a loss model run across dozens of loans, so diversification matters. A SASB is one loan, so the agencies size each class directly from the property's cash flow at a debt yield per rating, with agency LTV as a cross-check. In the illustration the AAA class detaches at 63.5 per cent agency LTV.
This article is one calculation from CMBS and CRE CLOs. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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