The market for CMBS has staged a comeback this year, and now it appears that there is some interest in restarting the market for CDOs backed by commercial real estate (CRE) as well.
Fitch Ratings said Thursday it has received initial inquiries for new ratings in this sector in recent months. Such inquiries had been “predictably absent” since the credit markets seized up in late 2007, it said.
Fitch didn’t indicate the number of inquiries it had received or the amount of collateral sponsors anticipated using. However, it said the types of collateral have ranged from seasoned CMBS to newly originated commercial real estate loans to “a hodgepodge of CRE debt.”
Many CDOs backed by commercial real estate performed poorly during the financial crisis. Last week, Fitch said delinquencies on those backed by whole loans rose to 14.8% in April from 14.1% in March. Nevertheless, the rating agency believes these deals are not all created equal; depending on the assets and structures, some of the proposed transactions may be able to achieve high investment grade ratings, as the most senior tranches of recent CMBS deals have, Thursday's special report said.
“On the other hand, because of excessive concentration of risk, potential rating volatility, or a host of qualitative factors, other proposals may not be able to achieve ratings significantly above the level of their average asset rating or may be deemed not ratable at all,” it said.
Although the proposals it has received may include various types of debt instruments, Fitch warned that it “views all real estate-related instruments as highly correlated,” and that this correlation increases the default rates it assumes in its model for rating CDOs backed by other kinds of structured finance assets.
The rating agency has received fewer inquiries regarding transactions backed by newly originated whole loans, although it expects to see more in the coming months.
Fitch said it has a “conservative view” on transitional properties and properties with less operating history than those typically securing CMBS loans. It will look at in-place cash flow and in-place value with no credit for pro forma income.
The ratings agency also said it will take a conservative view on “esoteric” types of property, including golf courses, special-use properties, and any type of property that doesn’t produce income.
“Land held for development or condo conversions will be valued conservatively with little to no credit given without proven sales prices and sales velocity,” the rating firm said.