CMBS Leverage Metrics Worsen, Fitch Finds

NEW YORK CITY—Performance metrics for legacy CMBS are doing just fine. As Trepp reported last week and as Fitch Ratings notes in its own report, delinquencies for these securities continue to fall.

However, some new issuance measures are worsening—namely the leverage metrics, according to Fitch Ratings' latest quarterly index report.

It reported that credit enhancement levels for US CMBS rose in first quarter of 2014, as underlying loan leverage increased.

Average AAA credit enhancement for Fitch-rated transactions rose by 75 basis points in Q1 from the prior quarter. "Credit protection for 'AAA' CMBS is now 150 bps higher than one year ago," according to Fitch Ratings' Managing Director Mary MacNeill.

Average BBB– credit enhancement increased by 62.5 bps quarter-over-quarter and is 75 bps higher than the first quarter.

In addition, the percentage of loans with Fitch-stressed loan-to-value ratios above 100% rose by nine percentage points in Q1 from the prior quarter to 65%. The percentage of loans having or allowing subordinate debt also increased, up by over four percentage points in Q1.

Other new issuance metrics, however, remained largely unchanged. The combined percentage of full and partial interest only loans was flat, while weighted average mortgage rates fell by 10 basis points from the prior quarter.

From a borrower perspective, of course, this trend is hardly a concern. The CMBS market is proving to be marvelously robust and flexible for borrowers with even unusually-structured deals able to secure financing.

Last month, to give one example, JK Equities closed on a $21.5 million CMBS loan from Natixis Global Asset Management to convert Baltimore’s Equitable Building into residential units. JK Equities is spending $32 million to convert the nine-story property into 180 market-rate housing units. Eastern Union Funding's Ira Zlotowitz and Meir Kessner helped secure the loan at a 4.91% annual interest rate on a three-year term.

As it announced the funding, Eastern Union reported increased activity in Wall Street lending in general, especially for complex deals like the Equitable Building transaction—which, it noted, is technically a non-recourse construction rehab loan with an additional level of mezzanine financing.