S&P Warns on CMBS; CRE Bust Here?
Standard & Poor's Ratings Services warned Tuesday morning of a coming slide in commercial mortgage-backed securities, as the economic recession appears set to take a bite out of one of the few remaining real estate asset classes to survive much of the turmoil in financial markets worldwide. The rating agency said it had recently performed a loan-by-loan, deal-by-deal summary of CMBS it had rated, factoring in current and expected economic conditions; the analysis found a "high downgrade risk" for recent-vintage CMBS, the firm said. "Since September/October 2008, Standard & Poor's has witnessed significant deterioration in the credit performance of the CMBS transactions it rates," said credit analyst James Manzi. "The economic recession combined with the absence of readily accessible financing in the capital markets has, in our opinion, skewed the credit risks related to the performance of CMBS sharply to the downside, and in excess of what we expected at origination or in our prior scenario analysis." Pundits have long predicted a crash in commercial real estate as the U.S. housing and mortgage mess has continued onward; it now appears as if those pundits may have been correct. The scenario analysis performed by S&P generated hypothetical term and maturity defaults on individual CMBS conduit/fusion loans based in part on expectations of future commercial real estate performance, the agency said in a press statement. It also estimated potential losses on loans that defaulted in the analysis, which produced projected lifetime losses on individual transactions. "Recent-vintage CMBS fared the worst in the analysis, with the 2005-2007 vintages posting PLLS in the double digits," said Harris Trifon, a credit analyst with S&P. "We're examining our entire CMBS portfolio to determine which transactions will be most susceptible to increasing defaults and losses through their terms. This examination considers property financial performance, specially serviced and delinquent loans, and relative credit enhancement levels. We plan to publish the results of this examination shortly," said Eric Thompson, analytical manager for U.S. CMBS surveillance. I wouldn't expect the results here to be positive, given what the initial analysis is showing over at S&P; the agency also suggested that new CMBS deal might face a tougher set of criteria in coming to market, as well. "Standard & Poor's will also consider the results of the scenario analysis in the rating assignment process, in particular the credit characteristics of loans that contributed to the higher PLLs we observed in more recent vintages," said Barbara Duka, analytical manager for U.S. CMBS new issuance. Write to Paul Jackson at firstname.lastname@example.org.