The high refinance risk in securitizations of single-borrower, single-family rental flows is one of the reasons Fitch Ratings has capped its rating on these transactions at A,’ the agency said in a press release today.
Other risks informing the cap include elevated cash-flow leverage and a dependence on property liquidation for debt repayment.
Taking issue with “presale reports for recent SFR transactions,” Fitch suggested its rivals have overestimated sales prices should foreclosure occur. “This line of thinking may persuade market participants to materially underestimate maturity default risk and the issuers’ ability to refinance,” the agency said.
Fitch went on to explain that SFR deals differ from traditional residential mortgage in that they do not fully amortize, which exposes sponsors to both term and maturity risk. While interest-rate caps and the currently low interest rate environment mitigates the term risk somewhat, the structure of these loans carries the risk of default if at maturity they cannot be refinanced, the agency said.
A lender would naturally expect the cash flow from the properties it is financing to cover the principal and interest payment of the loan.
Fitch said that low debt yield in recent SFR deals translates into higher leverage and a tougher time refinancing the underlying loan when it comes due.
“Given the leverage on SFR transactions, it is unlikely a secured lender would refinance the current debt, absent significant improvements in property cash flow,” the agency said.
It added that debt repayment assumptions in current deals seemed optimistic in light of sponsors’ plans to build SFR portfolios.