Fitch Ratings has reiterated that it is being “vocal in our resolution
While the commercial mortgage-backed securities market acceptance of pro-forma assumptions shows an appetite for increased risk, in the long term “continued usage of pro-forma assumptions will ultimately increase the uncertainty and volatility of CMBS performance and therefore the requisite spread to compensate for the risk,” Fitch said.
“In addition, a boom-or-bust cycle for CMBS loan performance would negatively affect REITs that regularly access the CMBS market, seek to sell to entities that finance the transactions with CMBS, and/or increase the volatility of and perception of risk for commercial real estate.”
Part of the problem with the previous generation of CMBS was the use of pro-forma assumptions, the ratings agency said, which is why it refused to give the CMBS transaction backed by a single loan on the Seagram Building an AAA rating. The sponsors used significant pro-forma income that makes the credit enhancement insufficient for that rating, Fitch said.
