Conduit CMBS transactions issued between 1995 and 1999 with sequential pay structures are the most likely to receive positive perspectives and future upgrades, Fitch Ratings told investors during a conference call.

In recent weeks, Fitch has upgraded 13 deals, nine of which were conduit transactions issued during that four-year span, said CMBS Director Karen Trebach. Currently, tranches from 90 outstanding deals are on positive review from Fitch. "Seasoned conduits have more positive perspectives than any other CMBS product, and we expect upgrades will continue to occur more quickly than on other types of deals," Trebach said.

The lockout dates on a majority of the underlying loans in these vintages have expired, leaving them free to refinance and so accelerating the loan paydowns, Trebach said. The resulting credit enhancement has been largely responsible for upgrades at all levels of the structure. Furthermore, the sequential pay structure creates better loss protection for classes by keeping the junior bonds at stable principal amounts. Future upgrades are expected to include transactions that were originally rated below investment grade.

Meanwhile, Fitch CMBS Director Eileen McDonald addressed concerns over the fate of carve-out bonds in light of reports that Freddie Mac would no longer pay a premium for them. Carve-out bonds are triple-A pieces of CMBS transactions that are taken out with the intention of selling them to Freddie. Buying these pieces, which include multifamily and manufactured housing collateral, enables the government-sponsored entity to fulfill its mandate to support low-income housing, although this was questioned in an article appearing in the Wall Street Journal last week. Fitch takes a credit-neutral stance on the structure, McDonald said, and does not expect Freddie's actions to impact investor appetite. Patrick Corcoran, head of CMBS research at JPMorgan Securities, took the same view.

"Freddie probably feels that they have laid the groundwork for the carve-out class," Corcoran said. "By this point, it is well established, and they don't need to be paying a premium to secure [these bonds]."

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