Fitch Ratings has undertaken an in-depth analysis of 34 floating-rate U.S. CMBS transactions, totaling approximately $27 billion, with plans to resolve the Rating Watch Negative status on $25.5 billion of these bonds in the coming weeks.
Fitch placed roughly $20 billion of bonds in these transactions on Rating Watch Negative in December of last year. Before the December action, the rating agency had more than $5 billion previously placed on Rating Watch Negative. The firm expects to resolve the Rating Watch Negative status on these transactions over the next 30 days.
"The assets in these transactions are generally transitional in nature," said managing director Mary MacNeill. "Many of the loans were underwritten with pro forma income assumptions that have not materialized as expected."
As with the analysis of recent vintage fixed-rate U.S. CMBS transactions, loans will be assumed to default during the term if the stressed cash flow would cause the loan to fall below 0.95 times (x) debt service coverage ratio (DSCR) or at maturity if the loan can not meet a refinance test of 1.25x DSCR based on a property specific refinance rate of 8% to 9% on a 30-year amortization schedule.
However, the rating category stresses created use higher property level cash flow stresses adhering to the above mentioned criteria.
Overrides to this methodology will be applied on a loan-by-loan basis if the senior position of the CMBS note or property specific performance warranted a different analysis.
Fitch said it expected most transactions would retain some ‘AAA’ rated bonds, while most bonds currently rated ‘A’ and ‘BBB’ are likely to be downgraded to below investment grade status.