Debt Yield and its Influence on Structured Debt

LOS ANGELES-According to Trepp, an estimated $1.4 trillion in commercial mortgages will mature between 2014 and 2017, and CMBS loans represent about one fourth of the total. Most of these loans were originated between 2004 and 2007, during the rapid run up in values and easy lending practices of commercial lenders in the years before the financial crisis. While many of these properties’ values have rebounded to or above near pre-crash levels, many of them are still over leveraged with respect to the amount of financing that lenders will lend today. This is because many of the 2004 to 2007 vintage CMBS loans were interest-only for a portion, or all of their term and were originated at typical LTVs in the 75 to 80 percent range. Thus the real question becomes how will these loans qualify for refinancing?

Before the financial crisis, lenders underwrote loan amounts based upon two key metrics, Loan to Value Ratio and Debt Service Coverage Ratio. However, during the crisis and since, the Debt Yield which is simply the ratio of the NOI divided by the loan amount, has been implemented by commercial lenders as an additional constraint on loan amount. Much like cap rates, which vary inversely with value, a relatively high DY is a more restrictive constraint than a lower DY. Lenders started to employ the DY metric as it became increasingly difficult to determine a property’s value due to a lack of arms-length, non-distressed sale comparables. As a result, LTV was rendered virtually meaningless.