According to Fitch Ratings, the leading U.S. CMBS deal to enter the market with transitional collateral is insufficiently credit enhanced. Fitch said, as a result, it would not give the deal the coveted triple-A ratings.

Fitch Ratings, to be clear, was not asked to rate NorthStar 2012-1 Mortgage Trust (NorthStar 2012-1). Fitch also did not reviewed the transaction’s documentation or performed detailed real estate analysis on the final underlying assets in the pool. Instead the analysts used public data.

Their analysis revealed that the credit enhancement is too weak even for a single-A rating, which is two full rating categories beneath its expected rating class. Standard & Poor's released its preliminary ratings on the deal and assigned both triple-A and double-A ratings to two tranches.

The main concern for Fitch is that a large part of the collateral is under-performing and relying on borrower pro forma business plans to increase effectiveness. Minor growth in cash flows has caused Fitch to worry about refinance risk and the possibility of default at maturity, which Fitch believes passes any it’s seen in CMBS 2.0. 

The largest loan in the pool, comprising 20.8% of the pool, is Buena Park, a retail center in California. Fitch’s concern lies in the below market occupancy, high rate of temporary tenants and low reported in-line tenant sales estimated at $200 per square foot.

The pool is also subject to a high potential for adverse selection due to concentration risk. Recently, Fitch has seen situations arise in concentrated pools where servicer fees and costs have created interest shortfalls that have impacted senior bonds. 

This type of pool is rated the same way as a large loan multiborrower transaction.