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KBRA expects ‘shifting tide’ for CMBS conduit credit

Kroll Bond Rating Agency (KBRA) noted in its monthly report that overall CMBS deal volume has increased the last three months, while the strong credit worthiness throughout the conduit market the third quarter may deteriorate.

Kroll Bond Rating Agency (KBRA) noted in its monthly report that overall CMBS deal volume both increased substantially in Q3 and that credit metrics were strong — but that a “shifting tide for conduit credit” may be coming.

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(click to expand)

In 3Q 2016, the “conduit credit metrics have been the strongest we’ve seen for some time,” states the report. KBRA’s average loan-to-value (LTV) decreased from 99.4 percent at the end of Q2 2016 to 95.5 percent by the end of the 3Q 2016, its lowest level since September 2013.

“However, there has been a strong uptick in leverage for the pools we’ve evaluated from mid-September forward,” analysts wrote. “One or two deals a trend doesn’t make, but the pools we evaluated since mid-September on a preliminary basis indicate that credit is shifting… the high leverage deals have noticeably weaker metrics than recent issuance.”

While the [Q3 2016] transactions had low beginning and ending average LTVs of 95.5 percent and 84.4 percent, respectively, “most of the recent transactions have had leverage levels in the triple digit range and substantially higher ending leverage.”

The agency has rated seven conduits that are expected to come to market later this month through early November — and all but two had leverage points in the 100s, ranging from 101.3 percent to 106.3 percent. KBRA “will be looking to confirm whether or not risk retention will ultimately result in improved credit.”

Q3 pricing volume reached $18 billion, a 90.9 percent increase over the last quarter, but year-to-date 2016 volume of $45.4 billion still lags 39 percent behind this time last year.