medium · Asset-Backed Securities asset-nuances
A CMBS Interest-Only (IO) tranche is highly sensitive to the 'Defeasance' of underlying loans.
Why is defeasance generally considered positive for an IO investor?
- It forces an immediate lump-sum payout of all interest to the IO holder.
- It allows the IO tranche holder to legally seize the underlying property early.
- It locks in the interest cash flows by replacing the mortgage with a Treasury portfolio.
- It increases the credit spread of the IO tranche relative to comparable corporate bonds today.
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