A stress test conducted by Fitch Ratings shows that 33% of its AAAsf-rated CMBS classes would suffer in a severe recession and if there's further deterioration of the real estate market.

Fitch subjected its rated CMBS to two stress scenarios — severe and moderate — by stressing property cash flows and commercial property capitalization rates.

In the severe stress, about 85% of AAAsf tranches would be able to pay in full with 40% remaining AAAsf, Fitch reported. In the moderate scenario, 77% of AAAsf tranches would remain AAAsf and 3% would migrate below investment grade.

The result may be a bit startling, considering the widespread belief that AAA-rated CMBS are bulletproof. But Mary MacNeill, Fitch managing director, says it's important to distinguish AAA downgrades from losses.

"Losses to Fitch rated CMBS bonds still remain remote," she says. "The study demonstrates that while downgrades would be expected if significant economic stress were to occur, most Fitch rated CMBS AAAs would remain investment grade rated."

The study further showed that seasoned transactions (2002 to 2004 vintages) are resilient even in the severe hypothetical scenario with 93% of the AAAsf tranches retaining an investment grade rating.

In contrast, more recent vintages (2005 to 2008) are more susceptible to downgrades in higher levels of hypothetical stress with only 35% of AAAsf tranches remaining investment grade in the severe scenario.

— Justin T. Hilley