With credit spreads tightening and defaults falling by the wayside, CMBS transactions have seen a recent ease in credit and structural protection, causing concern among CMBS market participants. Just last week, research from Nomura Securities International focused on this topic while Merrill Lynch looked at the higher leverage in IO loans potentially leading to extension risk.
Analysts at Nomura studied the different elements of credit standards and structural enhancements, specifically at LTV and subordination levels. The report stated that normally subordination levels should increase as LTVs rise, but based on the data, the opposite has been happening. Analysts report that recent enhancement levels and leverage ratios appear to be reaching the point where the market is positioned for a best-case scenario and the more recent vintages would probably be unable to handle stress, as well as seasoned vintages. Nomura said it is imperative to carefully scrutinize loans especially at the lower end of the capital structure.