NEW YORK CITY—As the volume of single-borrower CMBS issuance has gone up, so have loan to value ratios and credit enhancements, Standard & Poor's said Friday. The ratings agency also sees a marked shift toward interest-only loans.

“Full-term IO loans have become par for the course in single-borrower deals in recent years,” according to S&P. “All 14 of the Standard & Poor's-rated offerings in the first quarter were backed by full-term IO loans.” Similarly, just one of 35 deals originated last year was backed by a non-IO loan, while two out of 25 single-borrower loans issued in 2013 were not IO.

In common with the broader CMBS market, underwriting metrics have become “more aggressive” in single-borrower deals over the past few years, S&P says. The average LTV ratio has risen steadily and rather steeply since 2012: 66% that year to 74% in '13 and 83% in 2014. In Q1 of this year it rose again, to 86%.

Reflecting the same rising trend, S&P says average “AAA” credit enhancement levels were in the mid-50% range in '14 and Q1 of this year, compared to just 22% in 2009. However, S&P points out that on an individual basis, single-borrower deals can vary widely in credit enhancement levels—ranging from 25% to 68% in Q1.

“Credit enhancement levels depend on many factors, including the property type(s) backing the transaction,” according to S&P. For example, deals backed by trophy offices or super-regional malls typically have lower subordination levels versus a hotel asset or portfolio, largely on account of the more variable cash flows at lodging properties due to the lack of long-term leases.

Single-borrower deal volume is up thus far in 2015—Q1 saw $12 billion in new issuance, compared to $26 billion for all of last year—and so is its share of the total. Single-borrower offerings accounted for roughly 46% of market issuance through March 31, up from just under 30% in both of the preceding two years.

S&P sees a number of factors behind the increase in single-borrower CMBS. One is that originators, especially large banks, have competed effectively against balance-sheet lenders on some of the larger lending assignments because they can team up with other firms to share the risk.

Another is that conduit deals are smaller on average than they were in 2007, when they averaged upwards of $3 billion. In a $1.2-billion conduit deal, a single asset of $200 million to $300 million would represent greater than 20% of the collateral pool.

“We believe this potential concentration risk has played a part in the rise of single-borrower deals over the past few years,” S&P says. The increase in commercial real estate prices has also played a part: the Green Street Advisors Comercial Property Price Index for institutional-quality assets is now 14% above the August '07 peak. “All else being equal, rising values will lead to higher loan amounts.”

Generally speaking, single-borrower CMBS is backed mainly by regional malls, hotel portfolios and trophy offices. Q1 also saw deals backed by industrial portfolios and medical offices, while deals originated in '14 included offerings backed by cold storage facilities, health care-related properties, multifamily buildings and manufactured housing assets.

Instant Insights /

Single-Borrower CMBS Rises; So Do LTVs

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