On June 10, 2016, S&P Global Ratings released its Commercial Mortgage Evaluator™ (CME), a proprietary model used as a tool to help perform credit risk analysis associated with U.S. and Canadian commercial mortgage-backed securities (CMBS) collateral. The CME can be used to assess the credit risk of a pool of commercial real estate loans. This model utilizes individual loan-level credit metrics to derive loan-level credit enhancement levels. These in turn are aggregated to determine pool-level credit enhancement levels, which reflect the credit risk of the loans within a given pool.
We are publishing this article to provide instructions to the user on how to input and treat certain values in the spreadsheet.
Please register for S&P Global Ratings' CME at the following web site: https://www.sp.sfproducttools.com/sfdist/.
Frequently Asked Questions
How are adjusted NCF haircuts assigned to loans?
The adjusted net cash flow (NCF) is derived from the property analysis, and it represents our view of a long-term sustainable NCF for the property. A number of data sources are commonly considered for purposes of deriving the revenue, expense, and capital items, typically including issuer projections, appraiser estimates, historical performance, borrower budgets, and market data. For more detail, see "CMBS Global Property Evaluation Methodology," published Sept. 5, 2012.
The S&P Global Ratings' NCF derived from the application of our property-level analysis typically results in a haircut to issuer projected NCF in the range of 5%-10%. For lodging properties, the typical NCF haircut tends to be on the wider end of that range.
How are capitalization rates used for property analysis? How are they assigned in CME?
The capitalization rates used in property analysis are average long-term rates that encompass an entire real estate cycle. These are calibrated to an expected-case analysis, which is akin to a 'B' stress level. Capitalization rates vary by property type due to differences in credit risk. The base S&P Global Ratings' capitalization rates may be adjusted downward or upward for positive and negative characteristics, respectively, to account for specific considerations for the subject property. The most important of these considerations are those that are indicative of the market's perception of a property's quality and desirability: location, tenant composition, leasing structure, rent levels, and condition. Age, tenant rollover concentration, vacancy relative to the market, management, and overall market conditions also factor into this analysis. Many of the considerations that affect the analysis of S&P Global Ratings' NCF also have an impact on the S&P Global Ratings' capitalization rate. For more information about the specific capitalization rates currently used by S&P Global Ratings, see "Application of CMBS Global Property Evaluation Methodology In U.S. And Canadian Transactions," published Sept. 5, 2012.
The capitalization rates for the loan are entered in the "Cap Rate" field and are used to calculate the property's value based on the adjusted NCF or banker NCF haircut percentage if the override value is not entered by the user.
How is a loan with pari passu balances entered?
To enter loans with pari passu balances, enter the pari passu percentage of the loan in the current transaction. For example, if the current balance in the deal is $80 million and the current pari passu A-note balance is $20 million (for a total whole loan balance of $100 million), enter 80% in the pari passu percentage. If there is no pari passu balance, enter 100% as the pari passu percentage; otherwise, the system will default it to 0%. Please note that for loans with pari passu balance, the "Adjusted NCF," "Banker NCF," "Override Value," and the secured and unsecured debt balance columns should be pari passu adjusted (i.e., adjusted balance=pari passu percentage * unadjusted balance (listed in Annex A or banker/servicer tape)).
How are subordinate debt balances entered in CME?
There are five columns in CME where the subordinate debt can be entered. The current secured subordinate debt can be entered in "B Note Balance" or "Second Mortgage Balance." The current unsecured subordinate debt can be entered in "Mezzanine Balance." For the loans with pari passu balance, the secured and unsecured debt balance should be pari passu adjusted (i.e., adjusted subordinate debt balance=pari passu percentage * unadjusted subordinate debt balance (listed in Annex A or banker/servicer tape)). In addition, future LTV thresholds can be entered. For secured debt, it can be entered in "Future Sub-debt LTV Thresholds"; for unsecured debt, it can be entered in "Future Mezzanine LTV Thresholds." Based on the additional subordinate debt, the engine applies adjustments to the S&P Global Ratings' standalone LTV thresholds as per, "Rating Methodology And Assumptions For U.S. And Canadian CMBS," published Sept. 5, 2012.
How is a loan marked as specially serviced (SS) or credit impaired (CI)? What is the treatment for SS/CI loans?
Ans: To identify a loan as specially serviced or credit impaired, to enter the loss assumption in the "Loss Percentage" column. This loss percentage is typically based on the most recent valuation of these loans or any other method of valuation method. These losses are applied to the actual transaction -level credit support to derive the expected available credit support for the transaction following the resolution of the loan's resolution.
How are non-reporting loans identified and treated in CME?
To identify a loan as non-reporting, leave both "Adjusted NCF" and "Banker NCF Haircut Pct" cells blank. For a non-reporting loan, the standalone credit enhancement (SCE) and diversified credit enhancement (DCE) levels are calculated as weighted average of SCE and DCE of the loans in the pool having the same property type as the non-reporting loan, and then multiplied by a factor of 1.1. If the number of loans in the pool with the same property type is less than five, the SCE and DCE levels for the non-reporting loan are calculated as a weighted average of the SCE and DCE of the overall pool, and then multiplied by a factor of 1.1 (excluding the SS/CI, non-reporting, ground lease, and defeased loans).
How are floating rate loans populated in CME?
To treat a loan as a floating-rate loan, set the floater flag field as "Y." By default, the floater flag is set to "N." In addition, enter the "Spread" as well as the "Fully Extended Maturity Date.": When CME is run, the fully extended maturity date is used to determine what LIBOR is calculated to be, which is automatically applied to the spread based on the Cox-Ingersoll-Ross (CIR) curve in the model.
To address potential future interest rate risk for floating-rate loans that are not hedged with an interest rate cap, swap agreement, or other derivative instrument, or do not have one that complies with S&P Global Ratings' counterparty criteria, the analysis includes an additional floating-rate loan stress, subject to a minimum S&P Global Ratings' DSC of 1.0x at various rating levels.
The floating-rate DSC test at each rating category considers the following: (i)S&P Global Ratings' NCF; (ii)amount of debt; and (iii)sum of the spread over the reference rate (including amortization as a fraction, if any) plus a stressed forward interest rate. The stressed interest rate is based on "Credit Rating Model: CIR (Cox-Ingersoll-Ross) Interest Rate Model," published Nov. 3, 2010.
How are loans identified as defeased in CME? What is their treatment?
To mark a loan as defeased, enter "Y" in the defeasance flag. Please note that CME is not used when a transaction is fully defeased, as it is a full collateral substitution. The supporting rationale for the methodology used to allocate the defeased loans is outlined in "U.S. Government Support In Structured Finance And Public Finance Ratings," published Dec. 7, 2014.
How are ground lease loans entered and treated in CME?
To identify and run a loan as a ground lease, enter the code "GL" in the property type, the estimated refinance rate, and the ground rent payment. Ground leases are debt service coverage (DSC) based, not loan-to-value (LTV) based. Therefore, for ground lease loans, its SCE and DCE, excluding non-reporting loans at each rating level ('aaa' through 'b-'), is estimated using the estimated refinance rate and the ground rent payment provided as inputs.
How does the add/drop functionality work in CME?
To add a loan in CME, click the "+" sign on the record toolbar or open excel to input a new loan. To drop a loan from the transaction, enter "Y" in the "Drop Loan" field.
How are crossed loans identified in CME?
To identify a set of crossed loans in CME, enter the same identifier for each set of crossed loans in the "Crossed Indicator" column. For example, if loans 1 and 2 are in one set of crossed loans, then the user could enter a "1" in Crossed Indicator for both loans 1 and 2. If loans 3 and 4 are a different crossed set, then the user could enter a "2" in Crossed Indicator for both loans 3 and 4.
How are B-notes pieces or rakes modelled in CME?
For B-notes and rakes, enter the "Whole Loan Value," "Note Balance Senior," and "Note Balance Junior" fields. In addition, enter the type of subordinate debt (secured, unsecured, or both), and, if desired, enter the additional adjustment for subordinate debt. If modeling a B note, the whole loan value, which would represent the total value (not balance) of the entire loan. In addition, enter the A note balance and any pari passu balance, then also enter the note balance junior if there are any C notes or mezzanine debt, and then enter the type of subordinate debt (secured, unsecured, or both). Rakes are modeled as separate transactions and not along with the pooled components in CME.
What is the difference between comprehensive and adjusted CEs?
The comprehensive CE represents the CE at each rating level for all loans in the transaction, while the adjusted CE levels are the CE levels at each rating category for SS/CI loans.
Related Criteria And Research
Related Criteria
- U.S. Government Support In Structured Finance And Public Finance Ratings, Dec. 7, 2014
- Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012
- U.S. And Canadian CMBS Diversity Adjustment Factor Matrices, Sept. 5, 2012
- CMBS Global Property Evaluation Methodology, Sept. 5, 2012
Related Research
- Application of CMBS Global Property Evaluation Methodology In U.S. And Canadian Transactions, Sept. 5, 2012
- The Application of Standard & Poor's Revised U.S. And Canadian CMBS Criteria For The Sept. 5, 2012, CreditWatch Actions, Sept. 5, 2012
- Credit Rating Model: CIR (Cox-Ingersoll-Ross) Interest Rate Model, Nov. 3, 2010
Only a rating committee may determine a rating action and this report does not constitute a rating action.
| Primary Credit Analysts: | Deegant R Pandya, New York (1) 212-438-1289; deegant.pandya@spglobal.com |
| James C Digney, New York (1) 212-438-1832; james.digney@spglobal.com | |
| Secondary Contacts: | Tamara A Hoffman, New York (1) 212-438-3365; tamara.hoffman@spglobal.com |
| Ambika Garg, Chicago 312-233-7034; ambika.garg@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.