Conduit LTVs decline for first time in 3 years: Moody’s

CMBS conduit loan-to-values declined for the first time in three years during the Q1 2016, according to Moody’s new “Sector Update” report.   

The Moody’s LTV (MLTV) declined to 118.1 percent from 119 percent in Q4 2015, following an uninterrupted increase from just 90 percent in Q4 2010, the report shows.

The MLTV is still higher than the 117.5 percent high set during the previous market peak in Q3 2007, however.

“Even though MLTV is at pre-crisis peak levels, overall credit quality is better than at the peak due to high DSCR’s and recovering property fundamentals,” the ratings agency said in a statement.

“Due to interest rates declining by more than the cap rates used to determine value… debt service coverage remains at traditionally high levels, helping lower term default risk.”

The Moody’s/RCA Commercial Property Price Index (CPPI) has also been flat since December 2015.

“The quality of new CMBS loans improved as commercial property prices leveled off in the first three months of 2016,” Moody’s noted.

Tad Philipp, Moody’s director of commercial real estate research, said he expects leverage to stabilize during the remainder of this year, “albeit at an elevated level.”

Aaa (sf) bond spreads were volatile during Q1 2016, contributing to slowing conduit loan origination, he added, but “over the last few transactions Aaa (sf) spreads have tightened and conduit issuers have ramped up their lending again.”