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CRE Finance World, Summer 2014

A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 25 Chart 5 KLTV Distribution 11–20 Loans1 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA Amortization As new conduit programs are on the rise and loan origination becomes more competitive, loan structures will be tweaked in an effort to attract borrowers. One characteristic that has been on steady rise over the past year is the number of loans with IO periods. Generally, partial term IO loans are viewed more favorably than full term IOs as amortization allows for some deleveraging of the loan. This may mitigate term and balloon risk if there are negative changes in the financial status of the property. The combination of high leverage and IO periods is another example of the layered risks in the 11-20 bucket. For example: • As partial term IOs increased in the 11-20 group, KLTVs in this bucket also rose more than eight points in the past two years to 101.8%. In Q4 2013 partial term IOs had an average KLTV of 102.6%. • The top 10 loans follow a similar trendline, with total IO loans increasing from a low of 24.8% in Q1 2012 to more than 75% in Q4 2013. Chart 6 Interest Only Composition Top 10 & 11–20 Loans 1 The credit metrics for Q1 2014 are for all conduit transactions rated by KBRA through February 14, 2014. Source: KBRA KBRA’s conduit model is designed to capture all nuances in amortization (such as different interest rates, partial IO terms, and amortization speeds), as it models the actual amortization schedule of every loan in the pool. Debt Service The combination of increased leverage and reduced amortization could be detrimental to a loan if financial performance begins to wane. Recently, as interest rates have risen, higher loan coupons have pushed KDSC lower. In addition, the aforementioned increase in partial term IOs was a factor as KDSC is calculated using the highest debt service coverage during the loan term. To more closely examine debt service coverage at origination, we separated KDSC into the two categories below. On a positive note, we did not need a KDSC less than 1.00x category as there was only one loan among the largest 20 with a KDSC below breakeven. • > = 1.00x and < 1.20x • greater or equal to 1.20x First, we examined the metrics in the greater than or equal to 1.00x and less than 1.20x category. This population of loans is more sensitive to cash flow declines, which can result in heightened default risk. • In Q4 2013 the percentage of top 10 loans in this KDSC category more than doubled to 14.0% from YE 2012. In a bright spot, this group’s leverage dropped several points to 99.6% to settle below 100% for the first time. A View from the Top: Key Credit Metrics of the Largest 20 Loans


CRE Finance World, Summer 2014
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