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CMBS Credit Enhancement Could Spike on New Deals: Fitch

JAN 22, 2014 12:15pm ET
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The protection commercial mortgage-backed securities sellers must provide in order to obtain higher Fitch ratings for their bonds is likely to cost them even more going forward.

Fitch and some other ratings agencies also have been noting declines in CMBS underwriting metrics and increasing credit enhancement since last year.

A possible deterioration in the one major CMBS underwriting metric to show improvement last year, debt service coverage ratio, could add to the upward pressure on credit enhancement, Fitch warns.

When interest rates rise, the amount it costs to service debt increase and reduces this ratio.

"Even if current levels of DSCR are maintained, Fitch will, as it has steadfastly maintained over the past two years, increase CMBS credit enhancement if other underwriting parameters continue their deterioration," the rating agency said Wednesday.

Among other underwriting metrics that concern Fitch has been an increase in interest only loans. Fifty percent of CMBS loans in 2013 had some form of IO period, according to the ratings agency.

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