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June 9 (Reuters) - (The following statement was released by the rating agency)
One year after Fitch Ratings outlined its concerns on large loan U.S. CMBS deals, the primary worry has shifted from the quality of the properties themselves to the amount of debt at the lower end of the capital structure, according to the rating agency in a special report.
While the quality of the properties in recently securitized large loan CMBS deals has improved, Fitch’s concern has moved to the overall level of debt in the ‘BBB-’ to ‘B-’ rated tranches.
‘Absolute debt is now where we feel extra vigilance is needed for large loan CMBS and for lower rated tranches in some of these recent transactions there is just too much of it,’ said CMBS Group Head Huxley Somerville. ‘Additional debt, subordinate to the first mortgage, further amplifies our concerns as it raises leverage even further.’
Recent examples of this trend are in four large loan transactions that Fitch did not rate because of the sizeable debt in tranches rated ‘BBB-’ and lower, which the report details. The differences in ratings for these deals (two hotel properties, one healthcare facility and one suburban office building) ranged from one notch lower on ‘AAA’ rated debt to several notches further down the capital stack.
‘The amount of overall debt is sizable and while the loans may perform during their term, very real risks will appear at refinance, leading to possible defaults and rating downgrades,’ said Somerville.
‘Risks in Large Loan Deals - Revisited’ is available at ‘www.fitchratings.com’ or by clicking on the above link.
Link to Fitch Ratings’ Report: Risks in Large Loan Deals, Revisited (Risks Shift from Property Quality to Too Much Debt)