The CMBS Market During a Pandemic: A Fitch Ratings Q&A

MBA NewsLink interviewed Fitch Ratings Senior Director of Structured Finance Adam Fox and Senior Director Britt Johnson about the potential impact of the COVID-19 pandemic on the commercial mortgage-backed securities market.

MBA NEWSLINK: The market reaction to the COVID-19 pandemic has been swift and historic. As such, what dynamics or rating drivers is Fitch Ratings focused on in its commercial mortgage-backed securities surveillance business?

BRITT JOHNSON: Fitch has already taken action on SASB [single-asset single-borrower] hotel deals, conduits with high hotel and retail concentrations and SASB retail deals. Those deals now have classes on Rating Watch Negative, or Rating Outlook Negative. 

Those rating actions were based on a review of the properties, sponsorship and credit enhancement and were focused on classes that could potentially see rating actions if declines in performance is prolonged. We also considered whether certain properties were already underperforming and the likelihood of recovery. 

Fitch is focused on taking thoughtful actions to alert the market to this unprecedented issue and review performance and valuations in the coming months as we know more. Rating Watch Negative indicates that a rating action could occur within six months and a Rating Outlook indicates the potential for a rating change within 12-24 months. These impacted bonds could be affirmed if this crisis is short lived or if there is market liquidity for sponsors to refinance.

NEWSLINK: What property types and markets are you paying closest attention to? Why?

Adam Fox

ADAM FOX: Hotels are the top of our list given their operations reset daily and were the first to be significantly impacted. Store closures and the immediate change in consumer spending habits have placed retail right behind hotels for us. Retail assets are going to be highly storied; a Costco-anchored center is going to continue to perform while service-oriented centers with no food have largely been shuttered in many markets.

We are looking at all markets, particularly gateway cities and those highly dependent on tourism.

Multifamily assets are also a concern. For multifamily our concerns are based on the tenant profile of the property, not the location. We expect properties with large tenant concentrations in the hospitality, restaurant and travel industries will higher tenant delinquencies as soon as April.

JOHNSON: We are also paying attention to student housing. Fitch will continue to look at deals that have combined concentrations and take considered actions such as Rating Outlook Negative and Rating Watch Negative as appropriate.

NEWSLINK: The government reaction to the current situation is critically important. Any thoughts or concerns on how current actions or proposals from governments or central banks may impact tenants, landlords and ultimately credit ratings?

FOX: Certainly, restrictions limiting tenant evictions will impact multifamily landlords across the country, while potential GSE forbearances will limit defaults for Freddie Mac and Fannie Mae.

JOHNSON: We are currently evaluating the federal stimulus package and how it may affect borrowers and businesses.  Additional information will be published soon. In anecdotal discussions with servicers, they have discussed their willingness to consider forbearance and other ways to help borrowers through this time.

NEWSLINK: Any thoughts on new issuance in the current market environment? Conduit, SASB and CRE CLOs?

JOHNSON: Life insurance companies and GSEs are continuing to lend; however, current market instability has made it difficult for CMBS lenders to price loans with any degree of confidence.

NEWSLINK: Special servicing seems like an area that may be more active in the next 12 to 18 months. Any perspective to share in that regard?

FOX: We’ve been in close contact with master servicers through whom commercial borrowers began requesting relief on March 16, with the number requests increasing by the day. Many of these requests will likely find their way to special servicers. As we have seen historically, master and special servicers will work together to triage the influx of requests for relief.

We expect the broad forbearance guidance forthcoming will prevent Fannie and Freddie loans from going into special servicing initially. Requests for relief from GSE borrowers will be administered by primary servicers and limit the influx of relief requests going to special servicers.

For CMBS loans, we expect differences in special servicers and Controlling Class Representative preferences, pooling and servicing agreements, the type of relief requested, as well as the type of collateral and underlying performance to greatly influence how requests for relief will be addressed by servicer. We do not expect there will be a clear process addressing relief requests, at least initially; however Fitch is encouraged that master and special servicers are already coordinating efforts to respond to borrowers.

NEWSLINK: Any operational challenges or risks you’d point to and thoughts about how market participants may mitigate?

FOX: There is going to a level of market turmoil over the next six months, delinquencies will increase, property valuations are likely to decline in the near term and servicers are going to be very busy. Servicers need to work collaboratively to triage requests and respond to borrowers.

Fitch-rated servicers are sufficiently staffed to triage these requests and will hopefully not treat these requests for relief as a material defaults. CMBS-rated servicers are well capitalized to deal with the advancing requirements if borrowers cannot pay debt service in the coming months. 

One other challenge will be for market participants to allow servicers the time to work with borrowers, in accordance with servicing agreements. These requests are not going to be resolved in 30 days, and depending on the collateral, may take servicers and borrowers several months to negotiate a forbearance or modification.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at; or Michael Tucker, editorial manager, at