Prudential 2011 Annual Report Download - page 97

approximately 95% of the commercial mortgage-backed securities attributable to the Financial Services Businesses have estimated credit
subordination percentages of 20% or more, and 76% have estimated credit subordination percentages of 30% or more. The following tables
set forth the weighted average estimated subordination percentage, adjusted for that portion of the capital structure which has been
effectively defeased by U.S. Treasury securities, of our commercial mortgage-backed securities collateralized by U.S. and Non-U.S.
properties, attributable to the Financial Services Businesses based on amortized cost as of December 31, 2011, by rating and vintage.
U.S. Commercial Mortgage-Backed Securities—Subordination Percentages by Rating and Vintage—Financial Services Businesses
Vintage
December 31, 2011
Lowest Rating Agency Rating(1)(2)
AAA AA A BBB
BB and
below
2011 .................................................................................... 17%
2010 ....................................................................................
2009 ....................................................................................
2008 .................................................................................... 31%
2007 .................................................................................... 30% 31%
2006 .................................................................................... 33% 34% 32%
2005 .................................................................................... 33% 16% 26%
2004 & Prior ............................................................................. 31% 26% 31% 19% 27%
Non- U.S. Commercial Mortgage-Backed Securities—Subordination Percentages by Rating and Vintage—Financial Services Businesses
Vintage
December 31, 2011
Lowest Rating Agency Rating(1)(2)
AAA AA A BBB
BB and
below
2011 ....................................................................................
2010 ....................................................................................
2009 ....................................................................................
2008 .................................................................................... 42% 32% 57%
2007 .................................................................................... 22%
2006 .................................................................................... 65%
2005 .................................................................................... 11%
2004 & Prior .............................................................................
(1) The tables above provide ratings as assigned by nationally recognized rating agencies as of December 31, 2011, including Standard & Poor’s, Moody’s,
Fitch, and Realpoint.
(2) Excludes agency commercial mortgage-backed securities.
The super senior structure was introduced to the U.S. commercial mortgage-backed securities market in late 2004 and was modified in
early 2005 to increase subordination from 20% to 30%. With the changes to the commercial mortgage-backed securities structure in 2005,
there became three distinct AAA classes for commercial mortgage-backed securities with fixed-rate terms, (1) super senior AAA with 30%
subordination, (2) mezzanine AAA with 20% subordination and (3) junior AAA with approximately 14% subordination. The super senior
class has priority over the mezzanine and junior classes to all principal cash flows (repayments, prepayments and recoveries on defaulted
loans). As a result, all super senior bonds must be completely repaid before the mezzanine or junior bonds receive any principal cash flows.
In addition, the super senior bonds will not experience any loss of principal until both the entire mezzanine and junior bonds are written-
down to zero. We believe the importance of this additional credit enhancement afforded to the super senior class over the mezzanine and
junior classes is limited in a benign commercial real estate cycle with low defaults but becomes more significant in a deep commercial real
estate downturn under which expected losses increase substantially.
In addition to enhanced subordination, certain securities within the super senior class benefit from the prioritization of principal cash
flows. The super senior class is generally structured such that shorter duration time tranches have priority over longer duration time
tranches as to all principal cash flows (repayments, prepayments, and recoveries on defaulted loans) until the deal reaches 30% cumulative
net loss, at which point all super senior securities are paid pro rata. As a result, short of reaching 30% cumulative net losses, the “shorter
duration super senior” tranches must be completely repaid before the “longest duration super senior” tranche receives any principal cash
flows. We have generally focused our purchases of recent vintage commercial mortgage-backed securities on “shorter duration super
senior” tranches that we believe have sufficient priority to ensure that in most scenarios our positions will be fully repaid prior to the
structure reaching the 30% cumulative net loss threshold. The following table sets forth the amortized cost of our AAA commercial
mortgage-backed securities attributable to the Financial Services Businesses as of the dates indicated, by type and by year of issuance
(vintage).
Prudential Financial, Inc. 2011 Annual Report 95