The growing number of defeased loans as well as the transfer of loans to special servicing led Standard & Poor’s to increase Rating Agency Confirmations (RACs) in 2013, according to a report published this week.
RACs are written indications that amendments made to a loan pool do not change a structured finance rating as a result of the change, according to S&P.
S&P said that in 2013 it acted on 66 requests for rating agency confirmations because of defeasance activity, nearly double the 35 requests the ratings agency had in 2012.
Defeasance is the substitution of collateral for a loan that has been securitized. The substitution allows a borrower to replace the lien on the property with acceptable replacement collateral. This is usually done to facilitate a sale or refinance of the mortgaged property.
Rating agency confirmations on the back of defeasance represented 30% of S&P’s RACs in 2013 up from 21% in 2012. RACs on the back of defeasance activity accounted for less than 10% of all RACs provided from 2008 through 2011, according to S&P.
The size of the defeased loans in CMBS pools has also increased. “The average loan size was $96.8 million in 2013 compared to an average of $67.3 million in 2012,” said S&P.
“In our view, the growth in defeasance requests reflects the increased availability of capital in the real estate market affording borrowers the opportunity to refinance, oftentimes with a larger amount of proceeds,” analysts said in the report.
Requests for RACs on the back of the transfer of servicing rights to special servicers represented 62, or 28.3% of S&P’s RACs in 2013, compared to 44, or 26.5% in 2012. Between 2009 and 2011, transfer of servicing rights represented 30.4% of all RACs provided, according to S&P.