hard · Asset-Backed Securities
A conduit CMBS loan of $100 million defaults, and the Special Servicer obtains a new appraisal for $70 million.
After applying a standard 10% liquidation cost assumption, what is the Appraisal Reduction Amount (ARA), and which bondholders are first affected by the resulting interest shortfalls?
- The ARA is $30 million; the senior AAA bondholders experience immediate interest deferral to preserve cash for the Special Servicer's workout expenses.
- The ARA is $40 million; the Master Servicer must continue to advance full interest to all tranches until the property is sold at liquidation.
- The ARA is $10 million; it only affects the 'IO' (Interest-Only) tranches and has no impact on the principal-paying classes.
- The ARA is $37 million; interest shortfalls begin at the most subordinate class (e.g., Class NR or Class B) and move upward as the reduction consumes the 'interest-bearing' balance of the stack.
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