Although prepayment rates in CMBS transactions are beginning to level off after climbing higher in 2006, Fitch Ratings said that the levels of prepayments occurring in transactions are beginning to eat away at the interest margin for the available fund cap (AFC), which is now a common feature of the junior notes in these transactions.

Interest payments on junior notes backed by an available funds cap feature won't get paid in the event of an interruption in cash flow. "Assuming there are five to six loans underlying the junior notes, if the worse ones prepay, then it's likely you won't have enough funds to cover the remaining notes," said Andy Brewer, senior director in performance analytics at Fitch. Brewer said that a number of Fitch-rated CMBS transactions that are prepaying are grappling with this issue.

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