KBRA data suggests CMBS issuers are shopping around

The credit quality of the conduit CMBS deals rated by Kroll Bond Ratings Agency (KBRA) so far this year has been superior to that of non-KBRA deals, according to new report from the ratings agency.

The credit quality of the conduit CMBS deals rated by Kroll Bond Ratings Agency (KBRA) so far this year has been superior to that of non-KBRA deals, according to new report from the ratings agency.

KBRA told Real Estate Capital that the intended purpose of the Is the tide turning for conduit credit? report was solely to provide an objective look at overall conduit credit trends. 

But the report does note that KBRA has been selected less frequently this year to rate deals, on 56.5 percent of conduits through the first five months of 2016 compared to 71.7 percent for all of 2015, suggesting that ratings shopping is occurring on the part of CMBS issuers.

imgres“It is fair to say that our view on the non-KBRA rated conduits, which was generally not as favorable, was a factor in our not being selected to rate the deals,” Eric Thompson, a senior managing director at KBRA, told REC.

The ratings agency used the securitization tapes supplied by issuers to provide preliminary feedback that was used in their rating agency selection process to collect the data for the report.

The data shows that KBRA-rated deals were lower leveraged and exhibited less credit-barbelling. They also had higher average debt service coverage ratios (KDSCs) compared to the non-KBRA rated 2016 transactions, which makes them less likely to default.

The In-Trust KLTV of 100 percent compared to 104.1 percent for non-KBRA deals; and the All-In KLTV, which accounts for additional in-place debt as well as permitted future indebtedness, was 103.8 percent versus 107.4 percent. KBRA’s Credit Barbell Indicator hit 9.1 percent for KBRA deals versus 14.4 percent for non-KBRA deals.

In addition, both In-Trust and All-In KDSC were lower among the non-KBRA rated deals, 1.64x and 1.55x versus 1.76x and 1.64x on the KBRA-rated deals, respectively.

“Low KDSC levels generally impact our analysis by prompting higher (probability of default), and thus higher credit enhancement levels,” the ratings agency wrote.

Though the interest-only index for KBRA deals was higher than for non-KBRA rated 2016 deals, the ratings agency noted that this was due to a higher percentage of full term IO loans.

“On average, full term IO loans accounted for 30.4 percent of the KBRA rated 2016 deals compared to 20.3 percent for non-KBRA deals,” analysts wrote, adding that the higher IO index was also “offset by lower ending In-Trust KLTVs and relatively well diversified property type distributions.”

While the collateral inevitably changed from the preliminary tapes to securitization, “these tapes still provide a good barometer of broader credit conditions in the market.”

Despite the results, KBRA stated that, overall, “credit conditions are relatively unchanged from last year.”

SHARE