Posted on Thursday, May 5, 2011
After two years of no issuance, the credit quality of commercial-mortgage backed securities (CMBS) issued post recession has been strong, according to a new report from Moody’s Investors Service.
As the credit cycle continues, however, the New York-based ratings agency expects the leverage of the loans in transactions to increase.
Since issuance resumed in 2010, Moody’s has rated eight “new generation” or CMBS 2.0 conduit deals. In its latest U.S. CMBS review, Moody’s presents detailed metric analysis of this new issuance.
“Current underwriting is vastly improved compared with CMBS issuance from 2007, contrary to some reports in the
market,” said Tad Philipp, Moody’s director of commercial real estate research. “It is roughly consistent with that of 2004, one of the last ‘normal’ years before frothy underwriting kicked in.”
Philipp went on to explain, “In late CMBS 1.0 pro forma underwriting meant stretching for additional income from properties already operating at the zenith of their existence. In today’s market, underwriting properties beaten up by the recession may involve trying to get closer to normalized income.”
Moody’s notes that the post-recession deals are “chunky,” meaning that five or more single loans may each make up more than 5 percent of a transaction. This “lumpiness” adds an element of volatility to performance, according to the ratings agency.
Moody’s is also looking for loan leverage to increase as credit conditions loosen. Specifically, the agency expects a competitive lending market to drive up conduit loan-to-value ratios (LTVs) to mid-70s percentages, from in the 60s they range in currently.
Favorable commercial real estate conditions should mitigate the credit risk this greater leverage might pose at this time, Moody’s says.
Philipp added, “As the cycle advances and the effects of additional leverage become more pronounced, however, it may become necessary to increase subordination.”
By: Carrie Bay DS NEWS