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
Unsecured or corporate loans
are secured only by the corporate credit and not one specific asset
Seniority
the hierarchy of all the lenders’ claims against the cash flow or liquidation proceeds of the borrower
Claims are paid to the most senior positions first
how are claims of equal paid?
on a pro-rata basis
Covenants
certain financial metrics the borrower must maintain
DSCR, minimum equity, unencumbered assets, etc.
what type of equity markets
direct equity
indirect equity
direct equity
proprietorship
co-ownership
indirect equity
partnership
corporation
REIT
Capital MarketInvestors
Commercial Banks
Investment Banks
Insurance Companies
Pension Funds
Private Equity Funds
Sovereign Funds
Individuals/Families
Conduits
Mortgage-backed Securities
a type of bond or note that is secured by a pool of mortgage loans
Individual mortgages are pooled together and used as collateral to issue mortgage-backed securities sold to investors
CMBS or Commercial Mortgaged-backed Securities
secured by mortgages on commercial real estate
NHA MBS or National Housing Act Mortgaged-backed Securities
secured by CMHC (Canada Mortgage and Housing Corporation) insured mortgages on residential properties
RMBS or Residential Mortgaged-backed Securities
secured by non-insured mortgages on residential properties
how are mortgage backed securities structured?
as tranches
Each tranche participates in the cash
waterfall
Each mortgage backed security tranche participates in the cash flows derived from the underlying mortgages based on its level of seniority
which are the best mortgage backed securities tranches
More senior tranches, with a better credit ratings
Conduits
issue the mortgage backed securities
special-purpose corporations
what do conduits do?
They acquire the pool of mortgages
Create the mortgage-backed securities (referred to as securitization)
Sell the securities to investors
how do conduits make a profit?
if they can sell the securities for a price greater than the cost of acquiring the mortgages and by charging fees for the management of the securitization programs
