Reiterating its stance from earlier in December, Fitch Ratings said Monday that concerns regarding trouble in CMBS markets are likely overstated. While the rating agency said it expects commercial loan defaults to increase in 2008, it said that the loan default rates implied by the pricing of the CMBX market indices are "extremely high." The CMBX indices are the commercial equivalent of the ABX indices that have been much-discussed here on HW. Fitch said the pricing of these indices is reflecting "overall distress in the credit markets," and not solely the result of anticipated credit quality deterioration in underlying loans. From the press statement:
Differences exist among the four CMBX indices, including differences in credit characteristics. However, the loan default rates implied by current CMBX pricing on the most recently issued CMBX index are extreme. If one looks at CMBX.NA.BBB-.3, which closed at a spread of 938 basis points (bps) on Dec. 31, 2007, some market participants indicate that the implied default rate is almost three times historic default rates. Actual historic CMBS 10-year cumulative loan default rates are 8%, which means the implied default rates on CMBX are as high as 24% on average, given the recent pricing of CMBX. "Fitch expects loan defaults to rise given the current capital market environment, but not three-fold," said Susan Merrick, Managing Director and head of Fitch's CMBS group.
With the possibility of a prolonged credit crunch, financing for commercial real estate properties may continue to be difficult to obtain, Fitch said, noting that an increased risk of loan defaults merits some change in subordination levels -- especially for mezzanine bonds. "Given that Fitch sees more defaults coming, new issuance needs to have more protection everywhere, but particularly at the bottom of the capital structure since the top rated bonds have demonstrated their ability to withstand various increasing stresses," said Robert Vrchota, a managing director in Fitch's CMBS group. For more information, visit