price vs. risk: what does par mean for risk managers?
TRANSCRIPT
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PRICE VS. RISK:WHAT DOES PAR MEAN FOR RISK
MANAGERS?
May 2, 2023
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NEW ORIGINATION CMBS LOANS ARE TRENDING RISKIER
o Industry press is reporting that competition for deals has led to looser underwriting standards.
o The following chart details the DXScore rating of CMBS loans from 2011-2015; a score of 120 represents the lowest risk, a score of 0 represents the highest risk.
o This chart illustrates that general perception is, in fact, reality. Though the numbers do not indicate anything alarming, DXScore shows that deals are being pushed out further on the risk spectrum year over year.
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NEW ORIGINATION CMBS LOANS ARE TRENDING RISKIER
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
105-120 100-104 98-99 96-97 94-95 92-93 90-91 85-89 80-84 75-79 70-74
DXScore
DXScorePercentage of Loan Count
2011 Originations 2012 Originations 2013 Originations 2014 Originations 2015 Originations
20112012201320142015
*Historical Default Rate asssumes 2011 Figures
3-Yr Historical Default Rate*Average Standard Deviation
93.893.5
1.72%1.86%
4.173.614.215.374.37
2.05%2.10%2.55%
92.591.2
92.9
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INTRODUCING DXSCORE®
o DXScore is a credit rating system for commercial real estate loans.
o It measures a loan’s bundle of risks (LTV, DSC, pay history, tenant rollover, etc.).
o It is a risk rating system that provides the ability to measure relative risk for heterogeneous CRE loans with widely differing loan characteristics.
o DXScore standard calibration is 0 to 120; a US Treasury bond would be scored at 120.
o A typical bank loan has a DXScore of 82 or better.
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INTRODUCING DXSCORE®
o DXScore uncovers strengths & weaknesses in originations and existing loan portfolios
o It is an objective and independent metric to supplement internal risk rating systems.
o It provides efficient monitoring and tracking of risk in your loan portfolio ongoing over time
o DXScore is a repeatable, consistent, transparent and auditable methodology, meeting SSAE 16 standards
o The chart on the following page illustrates the relationship between probability of default and DXScore.
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HISTORICAL DEFAULT RATE
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Loan
Cou
nt
Defa
ult R
ate
DXScore
DXScore vs. Default RatePerforming CMBS Loans as of 12/ 31/11
Loan Count 1-Year Default Rate 2-Year Default Rate 3-Year Default Rate 4-Year Default Rate
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HISTORICAL LOSS GIVEN DEFAULT
o The following chart illustrates DebtX’s review of all performing CMBS loans that first defaulted after December 31, 2011 and were resolved prior to December 31, 2014. There were 1,648 loans that were performing on 12/31/11, subsequently defaulted, and were resolved on or before 12/21/14.
o There were relatively few loans that had a DXScore above 90 that subsequently defaulted.
o The volatile data on DXScore cohorts above 90 notwithstanding, the LGD is highly correlated with DXScore of performing loans before an event of default.
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HISTORICAL LOSS GIVEN DEFAULT
0
50
100
150
200
250
300
350
400
450
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
105-120 100-104 98-99 96-97 94-95 92-93 90-91 85-89 80-84 75-79 70-74 60-69 40-59 20-39 1-19
Loan
Cou
nt
Loss
& D
efau
lt Rat
e
DXScore
DXScore vs. Realized Losses (LGD %)Performing as of 12/31/11, Defaulted then Resolved by 12/31/14
LGD Loan Count LGD % 3-Year Default Rate 3 -Year Default Rate * LGD % LGD% Linear Trendline
Dashed portion of LGD% linerepresents fewer than 50 observations.
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DXMARK & DXSCORE: BANK VS. CMBS LOANS
o DebtX prices over $10 trillion in loans annually.o Using loans priced via our model-based service, DXMark, the
next chart shows DXMark prices for representative client banks versus the CMBS universe.
o For comparison, we then ran all of those same loans through DXScore, shown on the chart immediately following.
o The results show that price and credit score are two separate concepts; for example, B-notes and mezzanine loans can price at par if they are paying appropriate coupons, but they are inherently riskier than a first lien. Thus, DXMark and DXScore will not necessarily correlate.
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DXMARK: BANK VS. CMBS UNIVERSE
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
96%
97%
98%
99%
100%
101%
102%
103%
104%
Bank 9 Bank 5 Bank 6 Bank 7 Bank 8 Bank 1 Bank 4 Bank 3 CMBS Universe
Bank 10 Bank 2
Stan
dard
Dev
iatio
n
Wei
ghte
d Ave
rage
DXM
ark
DXMarkBank vs. CMBS Universe
Weighted Average Price Standard Deviation
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DXSCORE: BANK VS. CMBS UNIVERSE
0
2
4
6
8
10
12
14
16
82
84
86
88
90
92
94
96
98
Bank 9 Bank 5 Bank 7 Bank 6 Bank 3 Bank 4 Bank 8 Bank 1 CMBS Universe
Bank 10 Bank 2
Stan
dard
Dev
iatio
n
Wei
ghte
d Ave
rage
DXS
core
DXScoreBank vs. CMBS Universe
Weighted Average Score Standard Deviation
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Learn more about DXScore by visiting us at: https://www.debtx.com/corp/dxscore/
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