KBRA: CMBS End Quarter on High Note

The third quarter ended “on a high note” for commercial mortgage-backed securities, reported Kroll Bond Rating Agency, New York.

The KBRA September Trend Watch report said third-quarter deals ran  favorably from the perspective of beginning and ending leverage. “Last quarter’s [loan-to-value] figures are closer to the 2013 vintage than what we observed on rated transactions earlier in the year,” the report said.

The bond rating agency noted that while the lower leverage generally came at the price of higher concentration in a number of deals, it generally viewed the deals more favorably than it viewed early-2016 transactions as well as those from 2014 and 2015.”

[But] one of the big concerns noted by investors was ‘barbelling’ in regard to leverage,” the report said. It noted that its “credit barbell” indicator, which compares the proportion of loans with sub-70 percent LTVs to loans with 120-plus percent LTVs, hit a record 15.8 percent in the third quarter. This exceeded last year’s record 10.9 percent, which in turn was nearly twice 2014’s 5.8 percent figure. 

Fortunately, the percentage of loans with LTVs exceeding 120 percent equaled just 2.6 percent in the third quarter–lower than the first two quarters and markedly below the 5.9 percent high posted for 2015–KBRA said. The past quarter’s figure approaches 2014’s 2.2 percent figure.

“Given these statistics, it would appear that the third quarter deals may have been on the ‘good side’ of the barbell,” the report said.

CMBS private-label pricing volume reached $8.1 billion in September, the highest level seen since November 2015. For the quarter, pricing volume reached $18 billion, a 90-plus percent increase over the second quarter, KBRA said. The forward pipeline continues to grow with 15 conduits and a number of other private-label deals scheduled to launch before the end of the year.

Upcoming risk-retention rules may complicate those future deals, KBRA noted. Starting in December, CMBS issuers must retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk. “It isn’t clear whether credit will continue to worsen as the race is on to close deals prior to the implementation of risk retention,” the report said. “One thing is certain, the dust will settle soon enough. Then we will be looking to confirm whether or not risk retention will ultimately results in improved credit.”