Wells Fargo recently reported that, in its opinion, CMBS conduit loan underwriting “looked decidedly weaker in 2015” with only Debt Service Coverage Ratios (DSCR) improving. DSCR improvement was primarily a function of low interest rates that were prevalent for the majority of 2015. However, other key credit metrics, including debt yield and full- and partial-term interest-only periods (IO), showed deterioration compared with 2005 CMBS credit metrics, according to Wells. The Wells research summarized the key credit metric results for 2015 CMBS compared with 2005 vintage CMBS as follows:
- Debt yield slipped again in 2015, moving lower on the order of 30 basis points (bp), to 9.8%. The share of loans with debt yields below 9% moved higher, to 46.9%.
- The pace of debt yield deterioration slowed, but property mix explains much of the change. By property type, debt yield declined in all but the hotel sector.
- DSCRs have improved slightly to 1.78x, but the improvement came in the context of a 30 bp decline in average loan coupon. DSCRs remain high by historical standards.
- Amortizing loans fell to 33.3%, moving below the 35.0% share seen in 2005. Similar to debt yield, the shift toward hotel properties explains much of the improvement as the share of amortizing loans declined in each of the non-hotel property sectors.
- Interest-only periods for partial IO loans have increased, averaging 32.0% of the loan term from 31.1% in 2014 and 26.5% in 2013.
- LTVs are running at 64.8%. LTV ratios have hovered in the same area each year even as property prices in non-major markets have run up 72% since 2009, based on data from Moody’s and Real Capital Analytics.
- The share of loans with subordinate debt decreased to 11.6% in 2015 from 16.2% in 2014.