NEW YORK CITY—The past year has seen CMBS credit metrics improve marginally over deals that came to market in over the two previous years, Fitch Ratings said Thursday. However, the ratings agency also sees continued “bar-belling” between stronger and weaker loans in a securitization.
“Bar-belling is an issue because the stronger loans will not make up for losses that the weaker loans in the deal may incur,” says managing director Stephanie Petosa. The presence of those stronger loans may boost overall pool-wide statistics, thus masking the presence of the weak links. Additionally, Petosa says that interest-only loans are up to nearly 75% this year from 66.6% in 2016, “though many IO loans in 2017 deals had lower LTVs which will help curb refinance risk.”
Further, Fitch sees a couple of negative trends continuing. Along with the number of IO loans, the Fitch “haircut” to the issuer's underwritten cash flow continued to rise in '17. Likewise, single-tenant exposure and loans with additional subordinate debt increased over the past 12 months.
The stronger average pool credit metrics across all 52 Fitch-rated deals are attributable principally to the higher percentage of “credit opinion” investment-grade loans included in '17 securitizations, the ratings agency says. An average of 11.7% of each transaction comprised loans with credit opinions no lower than 'BBB−sf'. In '16 and 2015, credit opinion loans made up 8.4% and 4.0%, respectively, of Fitch- rated transactions. Even so, bar-bwlling remains an issue.
As deal quality overall has improved, the originator universe has been nearly cut in half over the past two years, with the number shrinking to 18 active originators at the end of this year following a high of 33 in '15. “Reg AB II and risk retention has caused some CMBS originators to rethink their strategies, which has led to several smaller originators exiting the CMBS market,” Petosa says.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
