Moody’s Investors Service said that it has raised its credit enhancement requirement for CMBS ratings as deals are increasingly structured with exposure to credit risks.
The average ‘Baa3’ credit enhancement for the transactions rated by Moody’s in the 3Q was 7.63%, up 180 basis points from the 5.83% level in Q1 2011.
This increase in credit enhamncement requiremnts matches a decline in Moody’s debt service coverage (MDSCR) in CMBS deals rated by ratings agency in Q3.
“The levels of debt service coverage are still high enough to align credit quality with that of the 2005 vintage,” said Tad Philipp, Director of CRE Research at Moody’s. “However, as MDSCR declines, credit quality will be closer to that of the early 2006 vintage.” MDSCR fell to 1.59 in the third quarter from 1.68 in the second quarter, and will continue to fall in the fourth quarter.
The average Moody’s loan to value (MLTV) ratio in the third quarter held relatively steady, increasing to 103.0% from 102.6% in the second quarter. The uptick in loan coupons that commenced with the spike in the 10-year Treasury rate in May 2013 therefore caused the decline in MDSCR.
Although deals in the 3Q were backed by trophy asset that providing highly durable cash flows that benefit was offset by the fact that these assets had a more volatile business model with higher loss given default (LGD) potential.
“Issuers continue to originate loans backed by weak malls even as first-generation loans backed by similar collateral have realized large losses,” said Philipp. “This exemplifies why we need continued diligence on these transactions.”