After Fitch Ratings performed two stress tests — severe and moderate — on its rated CMBS, the results reveal that 67% of ‘AAAsf’ ratings would remain strong in a severe recession or decline in the real estate markets’ activity.
Roughly 88% of CMBS tranches that Fitch rated ‘AAAsf’ in January 2008 either remain at that level or have fully paid out.
Fitch executed these stress tests as part of a larger study of how resilient global structured finance ratings would be to a protracted economic depression. These two particular scenarios were conducted by stressing property cash flows and commercial property capitalization (CAP) rates to a considerably worse degree than Fitch’s actual expectations.
For the severe stress test, Fitch replicated an extreme peak-to-trough decline in average property cash flow, using property CAP rates increase from the average market and the property-specific CAP rates used in Fitch’s surveillance analysis. Under the severe stress scenario, an good 85% of ‘AAAsf’ tranches would be able to pay in full with 40% remaining ‘AAAsf’-rated.
In its moderate stress test, Fitch hypothesized property cash flows falling sharply from peak to trough, while property cap rates remain similar to those used in the surveillance analysis. This replicates a severe double-dip recession, in which operating cash flows would plummet throughout all property types. The moderate stress scenario not only exceeds Fitch’s anticipated levels of stress but also the stress that the collateral has already experienced during the most recent crisis.
The test’s outcome shows that all ‘AAAsf- rated bonds would be able to recover fully after the stress period. Some 77% of ‘AAAsf’ tranches would remain ‘AAAsf’ and only 3% would fall below investment grade. The resulting rating migration for the moderate stress test is comparable to the actual rating migration that occurred during the financial crisis.
The tests proved that seasoned transactions (2002-2004 vintages) are especially resistant with 93% of the ‘AAAsf’ tranches holding an investment grade rating even under the severe scenario. More current vintages (2005-2008) have expectedly become more susceptible to downgrades in high levels of hypothetical stress, as only 35% of the ‘AAAsf’ tranches remained investment grade during the severe scenario.
Recent CMBS headlines point to growing delinquency rate in the sector. According to a May 30, 2012 Trepp report, the CMBS delinquency rate for the time ever surpassed the 10% market. Three months earlier, the CMBS delinquency rate was 9.37%, but has gone up substantially since.
Currently, $59.1 billion in commercial loans are delinquent and there are $79.2 billion in loans with the special servicer, Trepp said in the report. Despite this ,Mary MacNeill, managing director at Fitch, said that performance of deals that the rating agency has rated has actually stabilized in recent months.
"CMBS delinquencies have leveled off since reaching a record high last July, the current rate of which falls far below the delinquency rate implied by our moderate stress scenario," said MacNeill.