9.19.14: It’s a Split Decision for CMBS

In an interesting twist to the structure of CMBS conduit offerings, the junior AAA-rated class of some recent offerings has split ratings for the first time. The junior AAA-rated class is the second most senior class of CMBS, a notch below the AAA-rated super-senior class, which provides 30% subordination protection against losses (that is, the pool of loans underlying the CMBS offering must experience 30% in losses before this class experiences any principal loss). The junior AAA-rated class has historically been rated triple-A by all agencies (usually two or three) on a deal and the subordination levels were reconciled among the agencies to a single level in the range of 20%-24%, depending on the characteristics of the underlying loans in the pool.

It’s important for issuers to obtain the lowest subordination possible within a class. Lower subordination improves profitability; however, with the perceived deterioration of loan quality in more recent CMBS issues, one agency, Moody’s, has insisted on higher levels of subordination for the junior AAA-rated CMBS to be awarded an AAA rating, perhaps as high as 27%-28%. At first, issuers circumvented the problem by bypassing Moody’s and utilizing other rating agencies. But investors complained, resulting in split ratings on deals.

In the latest deals, all of which priced in September, issuers accepted an “Aa1” rating from Moody’s on the class in question. The transactions are WFRBS 2014-C22, WFBRS 2014-C23, JPMBB 2014-C23, COMM 2014-UBS5 and COMM 2014-LC17.

Based on the limited sample, it’s difficult to tell which option is more favorable for issuers in terms of profit. While issuers are grappling with whether to use Moody’s on the junior triple-A class, some industry pros said the problem could become moot before long. They predict issuers will eventually have no choice but to lift the 30% subordination level for super-senior classes if loan underwriting standards continue to slide.

This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , , . Bookmark the permalink.

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