Kroll Bond Rating Agency (KBRA) is flagging a rise in “Credit Bar-Belling” among CMBS loan pools, a practice that uses lower leverage investment grade (IG) loans to compensate for increases in riskier loans.
An examination of KBRA-rated conduits containing investment grade (IG) loans showed dramatic, seven-fold increases in high leverage (HL) loans — with LTVs greater than 110% — since 2012 to 36.4%, according to a new report from the rating agency.
“As the large field of originators competes for market share in an environment with increasingly thin profit margins, they have been more lenient on a number of fronts – particularly leverage,” KBRA stated in the report. “We are hopeful, however, that the rate of increase in HL loans will decelerate — as they already constitute more than a third of recent conduit transactions.”
Credit bar-belling is more likely to occur when IG loans are present because their positive credit attributes and higher LTVs offset the impact of weaker loans in LTV calculations — and the concentration of IG loans has more than doubled since 2013. That said, IG loans still represent a small percentage of the conduit universe, at just 4.1%.