(Editor's Note: This is S&P Global Ratings' ninth quarterly update on U.S. commercial mortgage-backed securities transactions published with the backdrop of the COVID-19 pandemic.)
- The overall U.S. CMBS delinquency rate generally continued its downward march in the second quarter, and now sits at 2.6%, with a majority of delinquent loans coming from the lodging and retail property types.
- Single-borrower issuance was off markedly by count (but not so much by volume) in the quarter, with only 11 deals priced. We provided preliminary feedback on six of them and rated only two. We reviewed the other deals, but declined to provide rating feedback due to a variety of credit concerns, mainly excessive leverage.
- Debt service coverage ratios were considerably lower in the second-quarter conduit deals, owing to higher interest rates.
- We now expect full-year issuance to fall in the $70 billion-$80 billion range.
COVID-19's Continuing Impact
As of the end of June, the overall delinquency (DQ) rate for U.S. commercial mortgage-backed securities (CMBS) transactions was 2.6% and has steadily declined--albeit with a minor bump up in June--since peaking around 9% in the summer of 2020. Although the overall DQ rate has declined, the share of delinquent loans that are 60-plus-days delinquent (i.e., seriously delinquent) is high, at about 91%. The lodging and retail sectors still maintain the highest 30-plus-day delinquency rate, now between 5% and 6%, while office is at 1.5%, and industrial and multifamily are below 1%. We believe office, especially the class B subsector, will face ongoing challenges in the hybrid work environment. On June 9, 2022, we published "U.S. Single-Borrower CMBS Reviews Show Common Themes And Mixed Outcomes," which details not only our current view by property type, but also the myriad rating actions that took place earlier in the second quarter.
SASBs Continue To Lead Issuance
Single-asset single-borrower (SASB) transactions continued their trend of driving private-label CMBS issuance in the second quarter, with 11 deals totaling about $14 billion, easily outpacing $6 billion from conduits. The deal count was significantly lower. An increase in both short-term and long-term interest rates may shake up the current dominance of floating-rate SASB offerings, especially if rates are expected to continue their upward march. That said, the many uncertainties challenging markets and the broader economy might leave borrowers opting to stick with short-term floaters despite the outlook for rates.
The property-type exposure for SASBs continues to evolve coming out of the pandemic. In the second quarter of 2021, SASB issuance was dominated by office collateral, accounting for over 40% of volume, with industrial in second at nearly 20%. The remainder was a mix of mostly multifamily and lodging, with a small amount of retail.
First- and second-quarter 2022 showed some similarities and differences to second-quarter 2021: Industrial/self storage remains active, while office has faded. There were also higher retail, lodging, and mixed use/other concentrations, generally in larger-sized deals. And while some of the "other" category comprises mixed use, which includes office, market concerns about the future demand for space have clearly had an impact on volumes.
In total, just 11 SASB transactions priced in the second quarter, following 26 in the first quarter. Of those, we rated two and provided preliminary feedback on six.
|Summary Of S&P Global Ratings-Reviewed SASBs(i)|
|Weighted averages||Q2 2022||Q1 2022||Q4 2021||Q3 2021||Q2 2021||Q1 2021|
|No. of transactions reviewed||6||20||22||19||20||15|
|No. of transactions rated||2||5||12||9||7||5|
|Average deal size (mil. $)||1,740||615||747||547||853||513|
|S&P Global Ratings LTV (%)||108.2||128.7||116.4||112.7||122.9||114.9|
|S&P Global Ratings cap rate (%)||8.4||7.8||7.6||8.3||7.8||7.3|
|S&P Global Ratings NCF haircut (%)||(19.1)||(15.4)||(16.1)||(17.0)||(19.5)||(16.8)|
|S&P Global Ratings value variance (%)||(45.5)||(45.9)||(47.7)||(43.4)||(43.3)||(42.2)|
|(i)The statistics within this table reflect only those deals that we reviewed. LTV--Loan-to-value. NCF--Net cash flow.|
Elevated SASB leverage continues to be a concern for us. In general, when we decline to provide preliminary feedback on a deal (six instances in the first quarter, five in the second), it is due to high leverage. We believe increased leverage is more a reflection of growing debt levels as opposed to our valuation opinions, which have remained more or less constant at (45)% in the second quarter, averaging in the (42)%-(48)% range for the past six quarters. Table 2 provides a summary of deals we reviewed in the quarter by property type.
|Summary Of S&P Global Ratings-Reviewed SASBs By Property Type|
|No. of transactions reviewed||2||1||3|
|No. of transactions rated||0||0||2|
|S&P Global Ratings LTV (%)||84.5||129.2||113.1|
|S&P Global Ratings cap rate (%)||6.6||7.8||10.4|
|S&P Global Ratings NCF haircut (%)||(8.9)||(17.3)||(28.5)|
|S&P Global Ratings value variance (%)||(34.0)||(49.9)||(51.7)|
|Primary markets (%)||29.4||87.8||23.7|
|Secondary markets (%)||70.6||12.2||74.3|
|Floating rate (%)||0.0||0.0||0.0|
|Fixed rate (%)||100.0||100.0||100.0|
|LTV--Loan-to-value. NCF--Net cash flow.|
The two deals we rated in second quarter were both backed by lodging properties--a portfolio of Red Roof Inns and a luxury resort in Boca Raton.
Mixed Metrics For Conduits
The largest change in loan metrics for conduit new issuance transactions was in debt service coverage (DSC), largely resulting from rising interest rates. Here are the key points comparing the first and second quarters:
- Overall loan-to-value (LTV) was little changed, down 30 basis points to 96.2%. There was a wide dispersion in deals we rated and those we didn't; the average LTV for the two rated transactions was 86.7%, while the average of the five we didn't rate was 99.6%.
- The DSC ratio declined more than 0.3x to 2.03x. We note that historically low interest rates and high interest only (IO) loan percentages clearly contributed to recent elevated DSC ratios. That said, the 10-year U.S. Treasury yield has increased, and the pool level metrics reflect this. Declining DSCs will also warrant higher subordination levels.
- Combined IO percentages remained high, at 87%, and the full-term IO percentage set a new post-Great Financial Crisis (GFC) quarterly record, at 78.6% of pools (eclipsing last quarter's print by 10 basis points).
- Our average cash flow and value variance to issuer values both were about the same, reflecting an average 16% cut to NCF and about 40% to value.
- Effective loan counts (as measured by the Herfindahl-Hirschman Index [Herf] score) were down, as were average deal sizes and loan counts.
Our 'AAA' And 'BBB-' Credit Enhancement Levels Were Well Above Market Levels
Our 'AAA' and 'BBB-' credit enhancement levels were about five points clear of the actual market levels. We continue to believe these 'BBB-' rated classes could prove relatively more vulnerable to event risk--especially with more concentrated pools/smaller deal sizes. As a result, we have not rated many of these classes in recent vintages.
Of the seven conduit transactions that priced in second-quarter 2022, we rated two (see table 3). The seven offerings had an average of 47 loans, with top-10 loan concentrations rising a whopping 480 basis points quarter over quarter, to 57.9%.
|Summary Of S&P Global Ratings-Reviewed Conduits(i)|
|Weighted averages||Q2 2022||Q1 2022||Q4 2021||Q3 2021||Q2 2021||2020||2019||2018|
|No. of transactions reviewed||7||9||8||7||9||28||52||42|
|No. of transactions rated||2||5||6||5||7||14||36||19|
|Average deal size (mil. $)||859||1,102||985||1,118||953||888||926||915|
|Average no. of loans||47||53||61||72||55||44||50||50|
|S&P Global Ratings' LTV (%)||96.2||96.5||98.5||98.5||93.4||93.7||93.5||93.6|
|S&P Global Ratings' DSC (x)||2.03||2.36||2.35||2.28||2.48||2.39||1.93||1.77|
|Final pool Herf/S&P Global Ratings' Herf||23.2/31.8||26.4/37.5||26.4/29.7||33.1/43.2||26.6/29.2||24.1/33.1||27.7/33.7||28.1/36.3|
|% of full-term IO (final pools)||78.6||78.5||73.6||66.9||73.1||70.7||61.6||51.7|
|% of partial IO (final pools)||8.5||11.0||14.3||15.6||15.7||17.9||21.4||26.2|
|S&P Global Rating's NCF haircut (%)||(15.7)||(15.8)||(17.0)||(16.0)||(15.2)||(15.8)||(13.4)||(13)|
|S&P Global Ratings' value variance (%)||(40.4)||(40.5)||(43.4)||(41.1)||(40.7)||(40.0)||(36.0)||(35.3)|
|'AAA' actual/S&P Global Ratings CE (%)||21.2/26.1||19.8/22.3||21.7/23.2||21.7/22.1||21.3/21.4||20.4/22.9||20.8/24.3||21.0/26.0|
|'BBB-' actual/S&P Global Ratings CE (%)||7.1/12.5||6.6/11.4||7.6/13.1||7.3/12.0||7.1/10.6||6.8/11.4||7.0/10.8||7.1/10.9|
|(i)S&P Global Ratings' credit enhancement levels reflect results for pools that we reviewed. Actual credit enhancement levels and other market statistics within the table represent every deal priced within a selected vintage or quarter, not just the ones we analyzed. LTV--Loan-to-value. DSC--Debt service coverage. Herf--Herfindahl-Hirschman Index score. IO--Interest-only. NCF--Net cash flow. CE--Credit enhancement.|
The conduit deals priced during second-quarter 2022 had slightly lower LTV ratios and considerably lower DSCs on a quarterly basis. The average LTV was 96.2%--a 30-basis-point decrease. The dispersion between the average LTV within the two deals we rated to the five that we didn't was quite wide, at about 13 points.
Average DSC fell 0.33x to 2.03x in the second quarter, as interest rates have risen. This still somewhat high DSC level is largely due to a lot of full-term IO loans. For the purposes of our DSC analysis regarding partial IO periods, we utilize the figure after the IO period ends, but partial IO percentages remain somewhat low. We should note that, unlike our SASB rating approach, which is driven by recovery assumptions and as such focused on leverage, our conduit approach looks at both leverage and DSC ratios, among other factors, in determining probability of default assumptions. Accordingly, continued reductions in pool level DSCs will, along with leverage and Herf score, continue to affect required subordination levels as they did in the second quarter.
IO as an overall percentage of the collateral pools fell to about 87% in the second quarter from 89.5% in the first. Full-term IO loans made up 78.6% of the collateral pools--a new 2.0 (post-GFC) quarterly record.
In our review, we make negative adjustments to our loan-level recovery assumptions for all IO loans. In some conduit transactions, we make additional pool-level adjustments when we see very high IO loan concentrations or when an IO loan bucket has no discernible difference in LTV versus the average. The average S&P LTV for full-term IO loans issued in first-quarter 2022 was about 98.4%--213 basis points above the overall average.
Effective loan counts, or Herf scores, which measure concentration or diversification by loan size, were down over 300 basis points to 23.2. This reduction also reflects the increased top-10 loan concentrations mentioned above. The average deal size fell somewhat sharply, off $243 million to $859 million in second-quarter 2022, while the average number of loans fell to 47, from 53 in the previous quarter (and 61 in fourth-quarter 2021).
Property Type Exposures Continue To Shift Within Conduits
We continue to see some movement in conduit deal property-type compositions from quarter to quarter. Industrial exposure was up a bit at 9%, though it has come off the highs from last year, which averaged about 12% across the vintage. Retail exposure was 22% in the second quarter, up from 18% in the first quarter. Concentrations have been steadily rebounding from their pandemic lows (just below 10%) in the second and third quarters of 2020. Lodging rose slightly to 6%, from 5% last quarter. While leisure travel has rebounded significantly, urban centers and convention hotels remain weak.
Although headlines about the future of office and hybrid work arrangements abound, this hasn't dampened the concentrations of the property type in conduits. The second quarter saw 40% of collateral backed by offices, off from 43% in the first quarter. Meanwhile, multifamily exposure fell four percentage points to 11%. Of the five major property types, multifamily has the second lowest delinquency rate at just 0.7% as of June 2022 (industrial has the lowest at 0.4%). Self-storage accounted for about 6% of pools, representing about half of the "other" category in chart 2.
Issuance Likely To Struggle
There was about $21 billion in second-quarter 2022 private-label CMBS issuance (excluding commercial real estate CLOs). The breakdown between SASB and conduit in second-quarter 2022 was again roughly two thirds/one third, or $14 billion SASB/$6 billion conduit, plus a couple of other deals. Our annual forecast of $110 billion in January has since been lowered to $90 billion, and headwinds abound, leading us to look for something in the $70 billion-$80 billion range. Long-term interest rates have risen pretty sharply although they've remained relatively rangebound of late, spreads across structured finance (and CMBS is no exception) are wider, inflation remains stubbornly high, and the probability of recession (especially in 2023) is far higher than it was when 2022 began.
- CMBS Global Property Evaluation Methodology, Sept. 5, 2012
- Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012
This report does not constitute a rating action.
|Primary Credit Analyst:||Senay Dawit, New York + 1 (212) 438 0132;|
|Secondary Contacts:||Rachel Buck, Centennial + 1 (303) 721 4928;|
|Mark Jacobs, Centennial +1 3037214926;|
|James C Digney, New York + 1 (212) 438 1832;|
|Ryan Butler, New York + 1 (212) 438 2122;|
|Global Structured Finance Research:||James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028;|
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 acknowledgement 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 nonpublic 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.spglobal.com/ratings (free of charge), and www.ratingsdirect.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.spglobal.com/usratingsfees.