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Monitoring Your CMBS Investments

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Structural changes have occurred in the CMBS market over the last decade that have altered the risk/return profile of commercial mortgages. They are now a more viable investment alternative to other fixed income investments. Returns on CMBS assets are not closely correlated to the returns of other fixed income assets, giving you greater portfolio diversification options.

When introducing CMBS assets into your fixed income portfolios, you will soon realize that this asset class is complex and involves several underlying factors that you must be aware of. A CMBS issue is collateralized by one or more pools of non-homogeneous loans on income-producing properties, each with unique risk characteristics based on multiple factors.

In assessing risk, you need to evaluate the same indicators as if you were assessing the financial condition of a loan. Watch list criteria should include:

-Debt Service Credit Ratio (DSCR) - The property's net operating income divided by loan debt service.
-Loan To Value Ratio - The portion of the amount borrowed compared to the value of the property.
-Concentration Risk - Based on property type, geographic region, industry or other qualitative factors.

In order to anticipate particular loan or property credit events and their impact, these watch list criteria need to be monitored on a regular basis. Another important reason for ongoing monitoring is to gauge the possibility of a rating agency action.

SS&C's integrated product suite, including CAMRA and LMS, can help you manage and account for your CMBS and their underlying collateral.

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