Issuance of single-borrower CMBS deals so far this year has reached $12.1 billion, more than the $10.1 billion issued in all of 2012, according to data from Commercial Mortgage Alert. Assisting in the rise of the single-loan asset securitization market, say investors and analysts, is a tweak in how some commercial-mortgage deals are evaluated by credit-rating firm Standard & Poor’s. Since the N.Y. company changed its standards for single-borrower bonds last September, the volume of such offerings has more than doubled. S&P’s rating market share in single-loan bonds has surged. The trend of single-asset deals is “disturbing” to industry pros as most believe investors would be better served if these loans were bundled into multi-borrower transactions with meaningful diversity.
Meanwhile, rating agencies Moody’s and Fitch are in disagreement on the use of “pro forma” underwriting when calculating cash flow levels in order to determine property values and, ultimately, subordination levels for deals they rate. Pro forma underwriting is widely recognized as one of the factors that caused high delinquency rates for loans originated in 2006-2007, when the use of pro forma cash flows was prevalent. The issue came to a head based on each agency’s view of the $1-billion single-asset CMBS financing of the Seagram Building in Midtown Manhattan. Using pro forma occupancy and rents, Moody’s gave an investment-grade rating to $670 million of the loan, while Fitch, using in-place rents and occupancy, said only $510 million of the loan was worthy of an investment-grade rating.
“We are not a fan of single-borrower CMBS transactions and have never bought CMBS from one, preferring the diversity provided by multi-borrower CMBS deals,” commented Jim Brett, head of CMBS analytics at ValueXpress. “For sure, we would never buy bonds from a single-asset deal with pro forma underwriting.”