Prepayment Trends in European CMBS—At Least Partly Explained

Abstract

This article provides a statistical tool to estimate prepayments for commercial mortgage-backed securities (CMBS) and to determine appropriate scenario assumptions for individual bond investment in either the primary or secondary markets. Prepayments result from borrowers' desire and ability to pay off their loans earlier than expected. A borrower may want to prepay to refinance assets when they increase in value, to achieve lower borrowing costs, or to retire debt after the sale of assets. Prepayments matter to investors because they affect returns and can lead to unexpected reinvestment requirements.