Fitch Eyes Large-Loan CMBS With 'Rakes'

The performance of large loans in certain commercial mortgage-backed securities deals is a matter of growing concern, especially for CMBS transactions with so-called rake structures, according to Fitch Ratings.Fitch senior director Mary MacNeill said the rating agency's concerns stem from the declining performance of such loans in large-loan deals, as well as in fusion and single-borrower deals. "In particular, 'rakes' present a problem because while the 'rake' serves as subordination to the loan it supports, a significant drop in performance in one large loan can translate into bond downgrades or Rating Watch Negative placement on the rake as well as the pooled portion of the trust." In a rake structure, the A notes are pooled into the proceeds of a deal, but the B notes (and other classes of subordinated notes) are carved out as a separate tranche, Ms. MacNeill said. "There is more event risk with rake structures," she said. The rating agency said it reviewed 102 CMBS deals in the first quarter, affirming 671 tranches in 73 deals, downgrading 35 tranches in 15 deals, and upgrading 29 tranches in 14 deals. "While downgrades for the first quarter exceeded upgrades, Fitch Ratings expects this trend to reverse for the remainder of the year, even as downgrades continue to rise," Ms. MacNeill said. Fitch can be found online at http://www.fitchratings.com.