DEC 10, 2013 3:52pm ET

S&P Sees CMBS Credit Quality Declining


Standard & Poor’s expects the credit quality of new issue commercial mortgage bonds to deteriorate in 2014 as the result of increased competition among lenders.

Commercial mortgage backed securities have performed well this year. The delinquency rate fell to 8.56% in the third quarter from 9.77% a year earlier and the amount of loans behind on payments fell slightly as well, to $35 billion from $42 billion at the beginning of the year. (The total amount delinquent peaked at just over $49 billion in late 2010.)

However, S&P expects that mortgage bonds issued next year will be underwritten to looser standards, both because of increased competition among lenders and higher tolerances from B-piece buyers.

Deals completed in 2013 are already riskier than those done in 2012, even if average credit metrics, including loan-to-value ratios, the percentage of interest-only loans, and deal diversity of conduits were generally stable through the third quarter. S&P thinks that slipping loan standards will eventually translate to higher loss rates for conduit deals issued during 2013 relative to other recent vintages.

However, the ratings agency said that new issuance greatly benefits vintage CMBS transactions, as evidenced by the significant uptick in maturing loan payoffs.

The dollar amount of delinquent loans has been declining for the past two consecutive years. Industry concerns regarding maturing 2007-vintage loans appear to have ebbed, as underlying property fundamentals, such as vacancy rates, indicate that conditions are improving for property owners. Under our downside economic assumptions, existing AAA ratings would likely remain unchanged, and potential downgrades should be limited to lower-rated classes.

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