class 8 PP: capital markets Flashcards
why invest in RE?
Diversification of investment portfolio assets
Low covariance with other assets
Availability of large size investments
Low volatility of returns for larger assets
to whom is the availability of large size investments important?
Important for investors that must deploy large sums of capital
Caisse de dépôt et placement du Québec
Canada Pension Plan
OMERS
what does the volatility of returns for larger assets depend on?
on holding period
the two markets in capital markets
private market
public market
what can be traded in both private and public markets?
debt
equity
A Debt Security
an obligation of a borrower to repay borrowed funds to the lender under a specified set of conditions
terms of the debt
specified set of conditions from a debt security
The terms and conditions of debt are governed by?
the Indenture
what do terms of the debt include?
Interest rate
Amortization
Maturity date
Security (Recourse, Non-recourse)
Seniority
Covenants
private issue
One Lender that gives Whole Loan
Syndicate that is a group of lenders is formed to make the loan
when are syndicates in private markets used?
when the size of the loan is beyond the financial capability or risk tolerance of a single lender
public issue
Offered directly to the public through investment bankers
what types of debt can public issues include?
Bonds
Notes
Commercial paper
what credit and risk include
Credit Metrics
security
Seniority
Covenants
Credit Metrics
Leverage
Coverage
security
Recourse
Non-recourse
Assets pledged as collateral (Ex: building mortgaged)
Leverage Metrics
look at the value of a borrower’s assets against the total amount of funds borrowed
what does a lower the ratio of funds borrowed to asset value mean?
the greater the amount of “equity cushion” exists
Protects the lender in case property values decrease
Examples of leverage metrics
Debt/Equity
Debt/Asset Value
Coverage Metrics
look at the funds being generated by the business as a going concern against the amounts required to service all of its outstanding debt
what does a higher ratio of cash flow available to the amount required to service its debt mean?
the lower the chance that a borrower will default on its loans
Protects the lender in case property values decrease
what is the most commonly used coverage metric?
DCSR
Recourse loans
not only guaranteed by the security but also by a claim over the entity’s other assets
can greatly reduce the risk of a loan
Non-recourse loans
solely guaranteed by the security
If the borrower defaults and the value of the security is insufficient to recover the loan amount it is the lender which suffers the additional loss
