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In addition to focusing on weighted average credit metrics with and
without the presence of IG loans, it is also important to focus on
medians. As noted in our Beyond the Credit Metrics commentary,
this statistic can provide a top side view of just how much IG loans
are bleeding down weighted average statistics.
This is illustrated in Exhibit 4 in regard to KLTV trends over the
past few months. The gold line in the graph depicts the three
month rolling average KLTV we present in each edition of our
Monthly Trend Watch publication. As can be observed in the
graph, the median KTLV provides a better top side view of overall
leverage in recent deals where credit bar-belling has been more
prevalent. Conversely, the median can actually fall through the
weighted average if there is little or no exposure to higher leverage
loans, which occurred for several periods in 2014.
Top side measures only go so far in CMBS, and it is more critical to
examine higher leverage loans on an individual basis and not solely
look at the pool’s KLTV. The presence of UHL loans can create
credit distortions in transactions, and contribute to meaningfully
higher risk. KBRA has observed that these loans have meaningful
higher credit enhancement levels than other loans in the pool,
which is appropriate given their increased propensity of default
and loss. To better assist investors in earmarking these loans for
further scrutiny, all KBRA conduit presales have downloadable
spreadsheets which provide each loan’s credit metrics and identify
all IG loans. Look for the KBRA Comparative Analytic Tool (KCAT)
link in the table of contents, which also allows investors to compare
individual KBRA rated conduits amongst one another across our
rated universe.
The bottom line is risk distribution can matter more than an
individual transaction’s overall credit metrics. Two transactions
with identical leverage, property type concentration, and collateral
quality can behave very differently if one of the transactions
exhibits credit bar-belling and has a large exposure to HL loans
that exposes the securitization to higher losses throughout its
term. In KBRA’s view, bar-belling, in and of itself, isn’t necessarily
a credit positive or a credit negative – and the answer may vary
depending on one’s position in the capital structure. Transactions
that exhibit bar-belling with sizeable portions of IG loans may be
more desirable to investors in the most senior portion of the capital
stack. They will ultimately benefit from less credit risk and more
certainty that IG loans will pay-off in a timely manner. However,
the same deal may be much less desirable to those investing in
more subordinate securities which have BBB or speculative grade
ratings. Those certificates will more likely bear the burden of
increased credit volatility and loss through the transaction term.
Exhibit 4
KLTVs
Source: Kroll Bond Rating Agency, Inc.
A Closer Look at Credit Bar-Belling