Money & Finance › Commercial real estate lending › CMBS: conduit loans pooled into commercial mortgage bonds
B-piece buyers: the first-loss investors in a CMBS deal
· Institution or agency
Fact, law or dataA rule, statute, definition or measured number.
Specialist investors who buy a CMBS deal's lowest-rated and unrated bonds, take the first losses, and usually control the special servicer.
See it on the Money & Finance map →How it works
In a typical conduit deal of $600 million to $1 billion, the bottom 5–7% is rated BB, B or unrated. B-piece buyers such as KKR, Rialto or LNR re-underwrite every loan before the deal is sold and can 'kick out' loans they dislike. In return for high expected yields they lose first: defaults wipe out their bonds before touching anyone above. As 'controlling class' they appoint and direct the special servicer until appraisal losses erode their stake.
Why it matters
They are the deal's first-loss underwriters, so their scrutiny shapes which loans get made and how hard workouts are fought.
Think of it like
Like the common equity in a building's capital stack: first to lose, and so the one with the say.
Facts, rules and data
CMBS offering documents naming the retaining third-party purchaser, Dodd–Frank risk-retention disclosures, and Trepp and rating-agency data on deal structures.
Debates and risks
Whether controlling-class rights give B-piece buyers too much say over workouts that affect senior bondholders is still debated.
Connections (2)
▸B-piece buyers: the first-loss investors in a CMBS deal buy the riskiest bonds in CMBS: conduit loans pooled into commercial mortgage bondsFact, law or data
The connection
In a CMBS deal, losses run bottom-up. B-piece buyers purchase the bottom 5–7% of bonds, rated BB, B or unrated, at high yields. Their willingness to take first losses lets the higher tranches earn AAA ratings and sell at low yields to insurers and pension funds.
When and why
In US conduit CMBS since the 1990s; buyers include KKR, Rialto, LNR (Starwood) and Eightfold.
How we know
Offering documents name the B-piece buyer and show tranche sizes and ratings; Trepp tracks their holdings.
Debates and risks
Some analysts doubt that B-piece buyers' loan reviews stay as tough in boom years as in busts.
▸B-piece buyers: the first-loss investors in a CMBS deal can satisfy 5% risk retention under Dodd–Frank Act (2010)Fact, law or data
The connection
Section 941 of Dodd–Frank requires securitizers to keep 5% of a deal's credit risk. For CMBS only, the rule lets up to two third-party buyers hold it instead, by buying a first-loss slice worth 5% of the deal, held unhedged for at least five years, with an operating advisor watching.
When and why
Rule adopted by six agencies in October 2014; effective for CMBS on December 24, 2016.
How we know
The final credit risk retention rule (Regulation RR) and deal disclosures naming the retaining party.
Debates and risks
Whether risk retention made CMBS loans safer, or mainly raised costs and concentrated the B-piece market, is still debated.