The protection commercial mortgage-backed securities sellers must provide in order to obtain higher ratings for their bonds is likely to cost them even more going forward, said Fitch Ratings.
Fitch and some other ratings agencies also have been noting declines in CMBS underwriting metrics and increasing credit enhancement since last year.
A possible deterioration in the one major CMBS underwriting metric to show improvement last year, debt service coverage ratio, could add to the upward pressure on credit enhancement, Fitch warns.
When interest rates rise, the amount it costs to service debt increase and reduces this ratio.
"Even if current levels of DSCR are maintained, Fitch will, as it has steadfastly maintained over the past two years, increase CMBS credit enhancement if other underwriting parameters continue their deterioration," the rating agency said Wednesday.
Among other underwriting metrics that concern Fitch has been an increase in interest only loans. Fifty percent of CMBS loans in 2013 had some form of IO period, according to the ratings agency.
In October last year, Moody’s Investors Service said that it raised its credit enhancement requirement for CMBS ratings ain resonse to the greater exposure to credit risks in recent vinatged deals. The average Baa3’ credit enhancement for the transactions rated by Moody’s in the 3Q was 7.63%, up 180 basis points from the 5.83% level in Q1 2011.