A View from the Top: Key Credit Metrics of the Largest 20 Loans Nicole Kotsianas A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 23 s we approach the midway point of 2014, new conduit lending programs have been added to the already long list of originators, bringing the total closer to 401. While issuance is expected to be up 15-20%, it isn’t clear that the volume increase can support the new entrants, the most the industry has witnessed since the boom. The increased competition will likely encourage weaker underwriting standards on the heels of a year in which CMBS posted its weakest credit metrics post-crisis. This degradation in loan quality is reflected in the increase in KBRA credit enhancement for CMBS conduits throughout the capital structure. For the purposes of this report, we take a closer look at the largest 20 loans in a CMBS transaction, as their credit can disproportionately drive the credit metrics of a given deal, as they typically represent more than 70.0% of the pool balance, on average. Not surprisingly, changes in credit among the top 20 loans often mirror that of the pool, as depicted in the graphs below. One standout is the percentage of loans in the top 20 that had interest only (IO) periods. Within the top 20 bucket, 39.5% of loans were partial IO in 2013 vs 25.9% in 2012, while 22.8% were full-term IO in 2013 vs. 12.6% in 2012. This compares to 32.8% partial IO and 17.5% full-term IO for all KBRA rated transactions. The story gets more interesting when we bifurcate the largest 20 loans into two groups as depicted in the graph below. Over the next sections we delve further into key credit metrics across the top 10 and 11-20 loan buckets. Chart 1 KBRA Pool Level Credit Metrics1 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA Chart 2 KBRA Top 20 Loans Credit Metrics1 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA These two subgroups include the top 10 loans, which on average represent more than 50% of the pool, and loans 11-20, which often represent nearly 20% of the pool. There is a clear distinction in the credit metrics among the two groups as outliers within the two pools are driving the averages apart. The marketplace generally puts a higher level of scrutiny on the top 10 versus loans 11-20, a practice that can mask credit creep. In effect, issuers are building pools where stronger-than-average large loans sit side-by-side with weaker-than-average loans — judging by credit metrics alone. A Associate Director Kroll Bond Rating Agency, Inc. Ravish Kamath Associate Kroll Bond Rating Agency, Inc. Terri Magnani Senior Director Kroll Bond Rating Agency, Inc.
CRE Finance World, Summer 2014
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