CMBS Called Favorable, but Analysts Urge Caution

Moody’s Investors Service finds commercial mortgage-backed securities loan credit quality indicators favorable for the time being but is cautious about 2013.

The company’s data for the fourth quarter of 2012 show underwriting “still compares favorably to that of the sector’s 2006-07 peak,” and recent reports suggest delinquencies have been lower.

But Tad Philipp, Moody’s director of commercial real estate, urges caution for the coming year in a press release and notes, “There is a high level of competition among conduit loan originators, and borrowers are gaining traction in their quest for higher proceeds and fewer protective features such as amortization and reserves.”

In the fourth quarter of 2012, conduit loan leverage held steady at a Moody’s loan-to-value ratio of 100% and the Moody’s debt service coverage ratio was in excess of 1.6x, a high point since the sector’s revival in 2010.

Separately, Fitch released a report noting that appetite for nontraditional CMBS deals is increasing, and so are questions about how they should be assessed and whether its analysts can assign them top AAA ratings.

The company indicated it is more cautious about some of these nontraditional structures than others.

Its report suggests it is relatively confident about rating commercial real estate collateralized debt obligations containing performing whole loans, noting that it would analyze this “in exactly the same way as a normal CMBS large loan deal.

“However, the same structure containing floating-rate loans on transitional properties would merit far less” than its top AAA rating.

Fitch indicated it has been asked for a lot of feedback on CMBS deals containing transitional properties and would only consider assigning its top rating to a single-asset transaction in this category “if it has meaningful recovery prospects even under very high stresses.

“A pool of such loans would be more likely to be rated AAA,” according to Fitch.