Recent CMBS ratings news
By PATRICK CROWLEY
11/7/2003

Even with an increase in downgrades and some heavy losses in the hotel sector commercial mortgage-backed securities (CMBS) continue to outperform other fixed-income investments, according to two separate reports from rating agencies.

Downgrades outnumbered upgrades during the third quarter but CMBS still fared well, Moody's Investors Service reports. "Based on our MOST surveillance system, the vast majority of CMBS ratings are stable, with 75% or more expected to remain unchanged during the coming year," Tad Phillip, Moody's managing director for CMBS and author of the market report, said in a statement. "We continue to keep a watchful eye on the recovery in the still-fragile hotel sector," Phillip said.

"The office sector, where the national vacancy rate has risen to approximately 17%, has begun to have an impact on CMBS performance." Rating activity on CMBS tranches -- affirmations and confirmations -- was heavy, up from 184 last quarter to 228 in the third quarter. The ratio of 1.42 downgrades per upgrade was nearly the same as the second quarter ratio of 1.44. Excluding credit tenant leases the downgrade to upgrade ratio was 1.19 to 1. Also in the third quarter there were a number of upgrades leading to ratings restoration for several large loans because the borrowers obtained adequate terrorism insurance, a trend Philipp predicts will continue.

Fitch Ratings also has a new report out on CMBS performance. The ratings service found that of the four core property types -- multifamily, retail, office and industrial -- retail has the highest number of loans that have taken losses. Retail also leads the pack in loss severity at 46.6%, Fitch Senior Director Mary O'Rourke said in a statement.

"Losses on retail loans make up more than 48% of the total balance of all losses but only 29% of the total CMBS collateral," O'Rourke said. "A disproportionate share of losses are being experienced by hotel loans -- less than 10% of CMBS collateral, but that sector's contribution to losses is almost 30%."

The total loss experience for the nearly 30,000 loans in the study came in at $305.7 million, with retail and hotel loans accounting for 79% of all losses on a dollar basis. The average loss severity for all property type loans that had losses was just 33.3%. Fitch forecasts an overall loan delinquency rate of 2% by year's end, an additional $2.87 billion of loan defaults and additional CMBS losses of $400 million. Still, with losses currently at 0.17% of all CMBS loans, Fitch said it expects CMBS to continue to outperform other bond markets.

Fitch has upgraded Class B ('AA' to 'AAA') and C ('A' to 'AA') in COMM 2000-FL2's commercial mortgage-pass through certificates. The upgrades came as a result of the anticipated repayment of Colonnade loan and despite the poor performance of two other loans, including the Northstar Loan, which is collateralized by four boutique hotels in New York City, Los Angeles and Miami. "The senior pooled classes' credit enhancement levels that will result after accounting for the repayment of the Colonnade loan are sufficient to warrant the upgrades," Fitch said in a statement. Affirmed were Class A ('AAA'), X ('AAA'), D ('BBB+'), G-WH ('B'), H-WH ('B'), J-WH ('B-'), G-CO ('BB+'), H-CO ('BB'') and J-CO ('BB-').

Moody's downgraded six classes of TrizechHahn Office Properties Trust Commercial Mortgage Pass-through Certificates Series 2001-TZH and affirmed or confirmed nine classes. The downgrades ranged from 'A2' to 'Baa3'; five affirmations came in at 'Aaa'; four confirmations were 'Aa2.' The transaction consists of five cross-defaulted and cross-collateralized first mortgage loans secured by a portfolio of 26 office properties with 17.1 million square feet of space. The portfolio had an occupancy decline of 10.1% from 95% at securitization to 84.9% as of June 30. "In the near term Moody's does not expect to see significant improvement in the Houston or Atlanta markets, which together comprise approximately 52.1% of the pool," Moody's said in its ratings report. "The current poor performance in these markets as well as their negative near term market outlook may lead to further erosion in cash flow as leases roll over. Further, it may impact the $295.7 million of debt maturing in April 2004 (the borrower has two one-year extension options for the 2004 maturity)."

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