medium · Asset-Backed Securities
A CMBS conduit pool contains a $50 million loan on a suburban office building. The loan is structured with an 'A-note' of $40 million, which is included in the conduit trust, and a 'B-note' of $10 million, which is held by a third-party investor.
If the loan defaults and the total recovery after liquidation is $35 million, how is the loss allocated?
- The conduit trust loses nothing because the A-note is protected by the entire CMBS pool's subordination.
- The B-note holder receives $10 million first, and the conduit trust takes the entire $15 million loss.
- The B-note holder loses $10 million; the conduit trust (A-note) loses $5 million.
- The conduit trust and the B-note holder share the $15 million loss pro-rata.
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