class 8 PP: capital markets

Question 1

why invest in RE?

Answer 1

Diversification of investment portfolio assets

Low covariance with other assets

Availability of large size investments

Low volatility of returns for larger assets

Question 2

to whom is the availability of large size investments important?

Answer 2

Important for investors that must deploy large sums of capital

Caisse de dépôt et placement du Québec

Canada Pension Plan

OMERS

Question 3

what does the volatility of returns for larger assets depend on?

Answer 3

on holding period

Question 4

the two markets in capital markets

Answer 4

private market

public market

Question 5

what can be traded in both private and public markets?

Answer 5

debt

equity

Question 6

A Debt Security

Answer 6

an obligation of a borrower to repay borrowed funds to the lender under a specified set of conditions

Question 7

terms of the debt

Answer 7

specified set of conditions from a debt security

Question 8

The terms and conditions of debt are governed by?

Answer 8

the Indenture

Question 9

what do terms of the debt include?

Answer 9

Interest rate

Amortization

Maturity date

Security (Recourse, Non-recourse)

Seniority

Covenants

Question 10

private issue

Answer 10

One Lender that gives Whole Loan

Syndicate that is a group of lenders is formed to make the loan

Question 11

when are syndicates in private markets used?

Answer 11

when the size of the loan is beyond the financial capability or risk tolerance of a single lender

Question 12

public issue

Answer 12

Offered directly to the public through investment bankers

Question 13

what types of debt can public issues include?

Answer 13

Bonds

Notes

Commercial paper

Question 14

what credit and risk include

Answer 14

Credit Metrics

security

Seniority

Covenants

Question 15

Credit Metrics

Answer 15

Leverage

Coverage

Question 16

security

Answer 16

Recourse

Non-recourse

Assets pledged as collateral (Ex: building mortgaged)

Question 17

Leverage Metrics

Answer 17

look at the value of a borrower’s assets against the total amount of funds borrowed

Question 18

what does a lower the ratio of funds borrowed to asset value mean?

Answer 18

the greater the amount of “equity cushion” exists

Protects the lender in case property values decrease

Question 19

Examples of leverage metrics

Answer 19

Debt/Equity

Debt/Asset Value

Question 20

Coverage Metrics

Answer 20

look at the funds being generated by the business as a going concern against the amounts required to service all of its outstanding debt

Question 21

what does a higher ratio of cash flow available to the amount required to service its debt mean?

Answer 21

the lower the chance that a borrower will default on its loans

Protects the lender in case property values decrease

Question 22

what is the most commonly used coverage metric?

Answer 22

DCSR

Question 23

Recourse loans

Answer 23

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

Question 24

Non-recourse loans

Answer 24

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

Question 25

Unsecured or corporate loans

Answer 25

are secured only by the corporate credit and not one specific asset

Question 26

Seniority

Answer 26

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

Question 27

how are claims of equal paid?

Answer 27

on a pro-rata basis

Question 28

Covenants

Answer 28

certain financial metrics the borrower must maintain

DSCR, minimum equity, unencumbered assets, etc.

Question 29

what type of equity markets

Answer 29

direct equity

indirect equity

Question 30

direct equity

Answer 30

proprietorship

co-ownership

Question 31

indirect equity

Answer 31

partnership

corporation

REIT

Question 32

Capital MarketInvestors

Answer 32

Commercial Banks

Investment Banks

Insurance Companies

Pension Funds

Private Equity Funds

Sovereign Funds

Individuals/Families

Conduits

Question 33

Mortgage-backed Securities

Answer 33

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

Question 34

CMBS or Commercial Mortgaged-backed Securities

Answer 34

secured by mortgages on commercial real estate

Question 35

NHA MBS or National Housing Act Mortgaged-backed Securities

Answer 35

secured by CMHC (Canada Mortgage and Housing Corporation) insured mortgages on residential properties

Question 36

RMBS or Residential Mortgaged-backed Securities

Answer 36

secured by non-insured mortgages on residential properties

Question 37

how are mortgage backed securities structured?

Answer 37

as tranches

Each tranche participates in the cash

Question 38

waterfall

Answer 38

Each mortgage backed security tranche participates in the cash flows derived from the underlying mortgages based on its level of seniority

Question 39

which are the best mortgage backed securities tranches

Answer 39

More senior tranches, with a better credit ratings

Question 40

Conduits

Answer 40

issue the mortgage backed securities

special-purpose corporations

Question 41

what do conduits do?

Answer 41

They acquire the pool of mortgages

Create the mortgage-backed securities (referred to as securitization)

Sell the securities to investors

Question 42

how do conduits make a profit?

Answer 42

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