Kroll Bond Rating Agency (KBRA) releases Februarys CMBS Trend Watch.
CMBS private label pricing volume increased in February to $6.6 billion, which is more than double the activity observed in January. However, 2019 year-to-date volume still lags 2018 at $9.3 billion, representing an 8.0% decrease year-over-year.
In March, we could see the launch of five to six single-borrower deals as well as three conduits, three commercial real estate collateralized loan obligations (CRE CLOs), and one small balance transaction.
With the dramatic rise in single-tenant exposure over the past few years, our Spotlight section this month takes a closer look at this asset class. While hovering in the high teens over the past couple of years, it surpassed the 20% threshold in February. As part of our review, we aggregated and compared single-tenant loan exposure for 2018 and 2017.
Compared with 2017, the single-tenant loans weighted average leverage increased slightly to 96.1% from 95.6%, while the interest-only (IO) Index experienced a more significant change, moving to 77.5% from 67.8%. While these figures indicate that risk increased among single-tenant loans in 2018, we also looked at the collateral characteristics of the underlying 2018 commercial real estate loans relative to 2017.
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In February, KBRA published pre-sales for seven deals ($4.2 billion), including two conduits ($1.5 billion), two CRE CLOs ($1.7 billion), two single borrowers ($570.0 million) and one single-family rental ($450.7 million). There were also 344 surveillance actions effectuated in February, including 326 affirmations, 15 upgrades, and three downgrades.
KBRA analysts also attended the SFIG Las Vegas conference in late February. On a positive note, CMBS market participants we spoke with were generally constructive on credit, given relatively low in-trust leverage, healthy debt service coverage, and current credit enhancement. But concerns were also expressed regarding credit-barbelling and single-tenant exposures, among other items.
Of course, not a day after the conference ended, a conduit launched (not KBRA-rated) with a BBB- subordination level at 4.5%, which seemed to negate some of those positive feelings. This was a head scratcher at this point in the cycle, as over the last several years we were only able to readily identify one conduit with a sub 5.0% BBB- enhancement (not KBRA-rated).
Related Publications: (available at www.kbra.com)
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Hinman, Associate Director
Kay, Senior Director
Thompson, Senior Managing Director