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CRE Finance World, Summer 2014

Chart 3 KBRA Top 10 & 11–20 Loans Credit Metrics1 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA For example, in Q4 2013, the average KBRA Loan-to-Value (KLTV) for the top 10 was 95.1% versus 100.8% for 11-20 in transactions rated by KBRA. Similarly, KBRA Debt Service Coverage (KDSC) for the 1-10 pool was 1.63x versus 1.50x for 11-20. We chose to break out the 11-20 loans as the marketplace does not necessarily scrutinize these loans as closely as they do the largest loans in the pool. In addition, “story” loans with more complex structures and less than squeaky clean sponsors, tend to appear in this 11-20 bucket. It is no secret that credit quality tends to drop off beyond the top 10 loans. This is one of the reasons we always provide detailed property and market information in our Asset Investment Memorandums for all the top 20 loans in our presale publications. Finally, in reviewing key credit metrics on a year-over-year basis, they tend to mask how quickly credit can deteriorate, as evidenced by a marked increase in leverage we are observing in the deals we have rated in Q1. Since it is too early to reveal 2014 trends, our analysis will concentrate on the changes in 2012 and 2013. Leverage Across both loan buckets, we observed increasing leverage levels on a year-over-year basis, and increasing numbers of highly leveraged loans with KLTVs in excess of 100%. This is an unfavorable trend, as these loans will likely experience higher loss severities should they experience term or maturity defaults. Examining the leverage dynamics for the top 10 and 11-20 buckets we noticed these key takeaways. CRE Finance World Summer 2014 24 • In Q4 2013, 11-20 loans that carried KLTVs greater than 100% increased to 60.3% from 47.8% in Q3 2013. These loans had an average KLTV of 107.3% and KDSC of 1.37x, a much lower KDSC than the 1.50x average for all 11-20 loans in Q4 2013. • In 2013, the percentage of loans with KLTVs greater than or equal to 110% in the 11-20 bucket increased from the previous year almost 80% to 15.1%. There were more than 4.5 times the number of loans in this category between 2012 (10 loans) to 2013 (46 loans). • The percentage of 11-20 loans with KLTVs less than 85% declined. The largest drop was in Q4 2013 when the percentage slid into single-digits, with only 6.9% carrying low leverage (78.0% KLTV). • In the top 10 bucket, the number of loans falling into the 85>=KLTV<100 category declined from 50.5% in 2012 to 40.8% in 2013 as more loans creep into the KLTV>=100 category. Chart 4 KLTV Distribution Top 10 Loans1 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA A View from the Top: Key Credit Metrics of the Largest 20 Loans


CRE Finance World, Summer 2014
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