Fitch updates criteria for rating CMBS transactions
Fitch Ratings plans to look more closely at property valuations and loss-coverage multiples when assigning ratings for fixed-rate commercial mortgage-backed securities transactions. Analysts said key tenets of the agency's fixed-rate CMBS methodology remain the same, but further downgrades are expected especially in the middle to lower part of the capital structure of the space. "CMBS portfolio performance deteriorated significantly in 2009-2010 after exhibiting relatively benign performance in 2007-2008," analysts said. "Income levels across Fitch's rated portfolios declined by approximately 16% from year-end 2008 to year-end 2009 and specially serviced loans and loans of concern increased significantly during 2010." Moody's Investors Service has downgraded tens of billions of dollars worth of CMBS the past few months because of higher expected losses for the pools due to increased delinquencies from troubled loans. Still, some analysts think CMBS stand to benefit the most from the Federal Reserve's decision to purchase another $600 billion of Treasury securities, which has become known as QE2. Fitch plans to add a new performing loan stress test to the term and maturity stresses already in place for the securities to "better address new and future transactions, of which Fitch expects to see significant growth." And Fitch will now base property valuations "on a capped income approach rather than a static market value decline to reflect improvements in portfolio data." Analysts also added a deterministic test to assess pools that have poor diversity or high concentrations of what Fitch considers risky assets, and loss-coverage multiples were changed to accommodate for movement through the current stress cycle. The current stressed-loan calculations for loans that fail maturity stress tests will be adjusted by their debt-service coverage ratio instead of time to maturity, Fitch said. Write to Jason Philyaw.