Classes of U.S. CMBS rated AAAsf by Fitch Ratings are pretty sturdy, it turns out. A stress test run by the rating agency found that they could withstand some pretty calamitous economic conditions, including deterioration in real estate markets and a hypothetical double-dip recession.
Fitch’s findings come on the heels of data from Trepp that showed CMBS delinquency rates—loans 30-plus days in arrears—had passed 10 percent for the first time ever.
Mary MacNeill, managing director and head of U.S. Surveillance at Fitch, told The Mortgage Observer that performance is measured by more than just delinquencies. “Fitch’s Loan Delinquency Index factors in 60-plus delinquencies, which peaked in July 2011 at 9.01 percent,” Ms. MacNeill said. “Fitch has found the 60-plus delinquency number to be more reliable than the 30-plus bucket, which is more volatile.”
The stress test that Fitch ran on the AAAsf-rated CMBS included both moderate and severe scenarios. The moderate scenario, it said, was similar to pressures seen during a severe double-dip recession—cash flow decreasing across all property types as cap rates stayed close to those seen in the agency’s surveillance analysis.
All AAAsf-rated bonds in this scenario would redeem in full following the moderate stress period. Furthermore, 77 percent would retain their AAAsf rating, with only 3 percent falling below investment grade. This scenario was most similar to what actually happened to similar tranches during the Global Credit Crisis.
Fitch made the severe scenario somewhat worse than the agency might expect for such a turn of events—marked by an extreme peak-to-trough drop in average property cash flow. “Cap rates,” the agency said in this scenario, “rise from the average market and property specific cap rates used in Fitch’s surveillance analysis.” Roughly 85 percent of these bonds would redeem in full, and 40 percent would retain their AAAsf rating.
Despite the persistent uncertainty in Europe’s financial markets, Ms. MacNeill was reticent to make a prediction about how it might affect U.S. investors. “It is unclear how the European crisis will impact the U.S. market,” she said. “Fitch’s moderate scenario provides investors insight as to further rating migration, should a further stress to the macro economy occur.”
Broken down by vintage, the test showed that seasoned transactions, circa 2002-2004, we more resilient, even in the severe scenario. Of these, 93 percent retained their investment grade rating. Vintages from 2005 to 2008, however, were more susceptible to downgrades. Ms. MacNeill explained that the seasoned vintages typically have built up higher credit enhancement.
“The existing AAA credit enhancement for these deals typically exceeds Fitch’s AAA targets, which means they can survive higher multiples of base case losses,” Ms. MacMeill said. “The seasoned transactions were more conservatively underwritten and have benefitted from amortization.”