NEW YORK CITY-Having gone largely into eclipse following the 2008 capital markes crisis, CMBS is all but walking on sunshine these days. New issues keep coming forth—in the case of large-loan securitizations, volume for the first four months of 2013 is likely to nearly equal the 12-month tally of $11.2 billion for 2012. Meanwhile, legacy CMBS saw its largest one-month drop in delinquency since Trepp LLC began releasing a monthly report in 2009.
However, Fitch Ratings expressed concern recently about the quality of the underwriting in the sizable securitizations that have been announced of late.”’Large loan CMBS deals of late are coming to market with some average assets and aggressive assumptions,” Huxley Somerville, CMBS group head at the ratings agency, said last month. “In fact, the large loan CMBS landscape is changing so dramatically that Fitch is questioning much of what it’s seeing.”
In a report issued two weeks ago, Fitch noted that many of the recent offerings come with credit protection the agency views as insufficient to achieve the ratings their issuers are after. “While Fitch has been rating large loan transactions for nearly 20 years, many of the recent offerings are being provided with credit protection that Fitch views as insufficient to achieve the desired ratings,” according to the report. “Today’s market includes assets whose quality was previously seen only in CMBS conduits which are better protected through diversified collateral. Because they are conduit qualityassets, they deserve conduit quality assumptions, which would result in lower rated debt levels.”
Adds Somerville, “’Because large loan CMBS deals hinge on the performance of one asset, it increases the potential exposure for investors if that asset is merely average in quality. ‘If credit protection is insufficient, exposure to a mediocre property may lead to downgrades on investment grade classes if the asset fails to perform..”
At the same time, the report notes that in the large-loan arena, cheaper bond pricing and increasing competition among lenders has made the loans more competitive. “As a result, large loan CMBS issuance is skyrocketing, with over $11 billion expected to be issued in the first four months of this year, compared with $11.2 billion for all of ‘12.”
Given what Fitch calls a combination of “unique property-level attributes, the current low interest rate environment, the prevalence of interest-only loans and aggressive income growth expectations,” there are several recent deals it couldn’t rate at the targeted levels. Among them were MSC 2013-ALTM (Altamonte Mall), MSBAM 2012-CKSV (Clackamas Town Center), COMM 2012-MVP (Sheraton Dallas Downtown, Sheraton Denver Downtown and Hyatt Regency St. Louis At The Arch) and a Barclays GGP Mall three-pack (Tucson Mall, Fashion Place and Town East Mall).
Conversely, though, both Fitch and Trepp noted last week that delinquencies from legacy securitizations generally have been declining since the year began. Trepp reported last week that newly delinquent loans were well below previous months’ averages. This decreased the upward pressure the market experienced in the early months of ’13, when, for example, the March numbers trended upward before a 47-basis point drop last month to 9.03%.
“Everything is working for the CMBS market right now, and the result is a sharp drop in delinquencies,” Manus Clancy, senior managing director at Trepp, says in a release. “Spreads remain low, allowing many formerly marginal properties to get refinancing. Special servicers are continuing to resolve many distressed assets with modifications and the pace of liquidation remains high. All of these factors should continue to push the rate steadily downward.”
According to Trepp, all major property types saw their late-pay rates drops in April. The biggest downward movement came from the lodging and multifamily segments as a result of payoffs, curing and restructuring, Trepp says.