medium · Asset-Backed Securities asset-nuances
In a CMBS conduit deal, a major $100M hotel loan (10% of pool) defaults. The Special Servicer obtains a new appraisal showing the property is worth $70M.
If the structure includes 'Appraisal Reduction Amount' (ARA) mechanics, what is the immediate impact on the trust's monthly distribution?
- The senior AAA bonds are immediately written down by the $30M loss.
- The defaulted loan is automatically sold at its newly appraised value of $70M.
- Servicer advances for interest are reduced based on the $30M loss estimate.
- The full $30M appraisal shortfall is first absorbed by the trust's cash reserve fund.
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