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S&P Sees Some CMBS Warning Signs
Tucker, Michael
Commercial mortgage-backed securities issuance reached $39 billion this year, compared to $15 billion during the same period last year, said Standard & Poor's, New York, raising cause for concern among some analysts. 

“We believe these new deals--especially those issued during the second quarter--are riskier compared with 2012 and other recent-vintage conduit/fusion deals,” said James Manzi, credit analyst with S&P's Charlottesville, Va. office. "The majority of this year’s issuance--roughly $23 billion--has come from conduit/fusion transactions."

Manzi said underwriting standards have slipped as the market gears up. “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,” he said.

In addition, pro forma underwriting, which gives credit to potential future increases in property revenue, has returned in some loans, mostly in primary markets, Manzi said. “Loan structures are also weakening in certain areas, such as cash management provisions and recourse," he said. "At the same time, more CMBS originators are entering the market, raising competition for a finite supply of loans.”

Largely because of record-low interest rates, most current deals contain very high debt service coverage ratios, S&P reported. Though the practice has not reached the highs seen in 2006 and 2007, “nevertheless, we believe the risks associated with continued deterioration in loan standards this year, especially in recent deals, could eventually lead to higher loss rates,” Manzi said.

But for now, CMBS credit trends show encouraging signs. Late-pays declined seven basis points in May to 7.37 percent, reported Fitch Ratings, New York, with delinquencies for transactions issued since 2009 standing at just 0.03 percent.

“The tighter post-recession credit environment coupled with still-low interest rates is helping to keep newer CMBS delinquencies hovering near zero,” said Mary MacNeill, managing director with Fitch. “Conversely, the peak vintage [2006-2008] delinquency rate remained high at 11.60 percent.”

Marielle Jan de Beur, senior analyst with Wells Fargo Securities, Charlotte, said this year’s heavy CMBS issuance has helped lower delinquency rates to some extent, “but a significant factor is also the continued decline of newly delinquent loans. We expect the positive momentum to continue throughout the year given the limited pipeline of maturing loans and the steady decline of term defaults,” she said.

Three years into a recovery in the property markets, “we are forecasting continued improvement through 2014,” Jan de Beur said. “Although all the major property types have increased occupancy levels and improved revenues over the past three years, the degree of improvement has varied between the property types, with apartment and hotel outperforming and retail lagging.”