While rating actions across the capital structure of many recent vintage CMBS deals will be considerable, mezzanine and super-senior AAA-rated classes should stay AAA for the near term, according to Fitch Ratings. The rating agency continues its review of 2006-2008 fixed-rate conduit and fusion transactions.
Fitch expects to finalize its methodology and start taking action on the affected bonds by the end of June.
Even though rating actions are not expected on the most senior tranches, Fitch expects to downgrade around 75% to 85% of subordinate AAA (A-J) classes from these recent vintages because of this revised loss forecast. Downgrades across all classes are expected to average two ratings categories.
Assuming that there is no property performance recovery, potential losses average 7.5%, with deals from the 2007 vintage reaching 13.5% or more.
Under Fitchs stress analysis, 50% of current projected losses will not happen until maturity which is, in many cases, sevento-nine years away. Therefore, the rating agency believes that it is premature to take rating actions that assume the full-maturity loss.
With seven-to-nine years of remaining term, there is significant uncertainty regarding the timing and magnitude of ultimate maturity losses, said Managing Director and U.S. CMBS group head Susan Merrick.
Fitchs stress analysis and rating actions take into account immediate and full recognition of potential term losses combined, initially, with 25% of the maturity losses rather then the loss that would come at full maturity. Losses average around 4.9% for recent vintage transactions, while some deals, specifically the 2007 vintage containing large concentrations of loans with pro-forma underwriting, might reach as high as 10.2%. This will impair credit enhancement to most junior AAA (AJ) classes, resulting in their downgrade.
In subsequent rating reviews, the proportion of maturity losses considered in the stress analysis and rating actions will increase with the full extent of maturity losses taken into account at least two years prior to a loans maturity, said Merrick.
In forecasting losses, Fitch assumes three main things: peak-to-trough value declines of 35%; immediate and sustained income declines of 15%; and current loan performance recognized through detailed review of the 15 largest loans, Fitch Loans of Concern, and specially serviced loans.
Should potential term and maturity losses ultimately be realized, mezzanine (A-M) AAA classes from certain 2007 vintage conduit transactions would likely be at risk for downgrade. The rating agency continues to review 2006-2008 fixed-rate CMBS conduit deals to determine the affect of current and expected economic conditions as well as actual and expected property and loan performance on existing ratings. Fitch expects these A-M bonds will be assigned Negative Rating Outlooks at the conclusion of its initial review.