Standard and Poor’s is warning that new conduit commercial mortgage-backed securities deals, particularly those issued in the second quarter, are riskier compared with 2012 and other recent vintage transactions, causing a so-far modest rise in credit enhancement that could increase.
“Borrowers have increased leverage, riskier interest-only loans have become more prevalent, and the percentage of lodging collateral, which Standard & Poor’s considers one of the riskier property types, is climbing,” the company said in a report Monday.
Standard & Poor’s also noted concerns about rising loan-to-value ratios, loan structures weakening in areas like cash management provisions and recourse, the reappearance of
In addition, S&P finds some cause for concern in greater multifamily and residential asset concentrations, the higher prices paid for New York City offices.
“Most current deals contain very high [debt service coverage ratios], mainly as a result of low interest rates. These risky practices have not reached their 2006-2007 highs,” S&P said, noting some relative positives in the market that it said make the risks “manageable” for now.
“Nevertheless we are seeing some signs of heightened risk and will continue to monitor the deals we rate for further signs of declining loan and pool quality that could eventually lead to increased defaults and losses,” the company’s analysts added in the report.
CMBS issuance has surged in 2013 compared to the previous year’s, from $15 billion to $39 billion so far. Conduit deals represent 23% of this total, according to S&P.
