Rating Agencies: Just How Concerned Are You? 2:30-3:30 pm

Transcription

1 Rating Agencies: Just How Concerned Are You? 2:30-3:30 pm Moderator: Harris Trifon, Portfolio Manager - CRE Debt, Western Asset Management Company Panelists: Nitin Bhasin, Managing Director, Kroll Bond Rating Agency, Inc. Dan Chambers, Managing Director, Fitch Ratings James Manzi, Senior Director, Structured Finance Research, Standard & Poor's Ratings Services Annelise Osborne, Vice President, Senior Credit Officer, Moody's Investors Service

2 CMBS Credit Trends Q Update CREFC West Coast High Yield Summit May 2014

3 Conduit Loan Leverage» Q1 conduit loan MLTV was 107.3%, highest to date in CMBS 2.0. Moody s and underwritten LTV are each expected to increase by about 1% in Q2» Approximately one quarter of the loans in Q1 had pre-financial crisis peak leverage, as measured by MLTV (i.e. within ~5% of the 117.5% peak) Loan-to-Value Ratio 120% 110% 100% 90% 80% 70% 60% 50% Moody's LTV Underwritten LTV Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q % 117.5% CMBS 1.0 / CMBS % 66.8% 108.2% 67.6% Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

4 Growing Share of Loans U/W Near 75% LTV» 75% LTV typically the upper end of originators guidelines» In Q1, roughly one in five conduit loans had underwritten LTVs at/near 75%; in Q2, share may exceed one in four. 30% Percentage of Loans 73% U/W LTV 25% 20% 15% 10% 5% 0%

5 Conduit Credit Enhancement» Baa3 CE increased in response to higher conduit loan leverage, to 8.6% in Q1 from 7.9% in Q4. We did not rate Baa tranches on 8 of 10 Q1 Moody s rated conduit deals» While some quarters have more fusion loans or greater barbell distribution among collateral, the trend of rising leverage being met with rising enhancement levels persists 115% Moody's LTV [L] Baa3 (sf ) CE [R] 9.00 Loan-to-Value Ratio 110% 105% 100% 95% 90% 85% 80% 75% Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q Moody's Baa3 (sf) Credit Support

6 Conduit MLTV Distribution» Share of loans with MLTV greater than 110% up to 41.1% in Q1 from 27.5% Q4» Pipeline indicates further increase in 110%+ MLTV loans in Q2 60% 1Q Q Q Q Q Q Q Q % 40% % of Cohort 30% 20% 10% 0% <80% 80%-90% 90%-100% 100%-110% 110%-120% >120%

7 Freddie Mac Leverage» Freddie Mac MLTV declined to 111% in Q1 from 113% in Q4 2013» We rated 2 of the 3 Freddie conduit deals issued in Q1 2014» Johnson-Crapo GSE reform bill announced in March. Unlikely to pass in 2014 and unlikely to have major credit impact should it pass as drafted 120% Moody's LTV Underwritten LTV Estimated Moody's LTV 110% Loan-to-Value Ratio 100% 90% 80% 70% 60% 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014

8 Share of Conduit Loans with Subordinate Debt» Trending up since Q3 2013, 22.4% of Q1 conduit loans had sub debt 25.0% Percentage of Loans with Sub-debt (by count) 20.0% 15.0% 10.0% 5.0% 0.0% 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1

9 Share of Conduit Loans with NCF Haircuts >10%» Share of loans with >10% cash flow haircuts increased by about 10% over the last 3 years» Primarily due to underwriters not marking down income we view as above market or unsustainable as opposed to creatively writing up income (pro forma) Share of Loans with Haircut >10% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1

10 Office a Driver of Increasing NCF Haircuts» We have noted instances of leases accounted for at pre-crisis peak rents and have marked them down to levels we deem sustainable. Weighted Avg. Property NCF Haircut 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Haircut (All-Properties) Haircut (Office) 2013Q2 2013Q3 2013Q4 2014Q1

11 MDSCR Generally Above CMBS 1.0 Levels» Moody s DSCR decreased to 1.44x in Q1 but poised to bounce back slightly in Q Moody's Actual DSCR CMBS 1.0 / CMBS Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

12 Interest Only Loans» Share of IO loans remains just over half, set to rise slightly in Q2 Percentage of Interest-Only Loans 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of Partial IO % of Full IO Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 CMBS 1.0 / CMBS % 53.0% Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

13 Leverage Profile of Interest Only Loans» Theoretically the bars should slope from left to right, so that decreased leverage offsets less amortization» Full IO loans have below average leverage at 105% MLTV, but not by enough to make up for the deleveraging benefit of a fully amortizing loan, all else being equal Moody's LTV 112% 111% 110% 109% 108% 107% 106% 105% 106% 108% 110% 108% 111% 110% Q1 MLTV Avg 105% 104% 103% 102% 101% Amortizing 12 Mth Partial IO Mth Partial IO Mth Partial IO Mth Partial IO 57 Mth Partial IO Full IO

14 Conduit Diversity» Deal sizes and loan Herf remain range bound» High borrower concentration in some pools may be mitigated by cross-collateralization Effective Number of Loans/Properties Property Herf Loan Herf Q3 03 Q4 03 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 CMBS 1.0 / CMBS2.0 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

15 Asset Class Composition» Retail, office remain the big two, back nearly half of CMBS loans» Share of multi-family rose to 17.8% in Q1 (4 th consecutive increase); will approach 20% in Q2» Increased CMBS share follows GSE reduction in multifamily lending; $47.6 billion in 2013 from $58.3 billion in % 1Q Q Q Q Q Q Q Q % % of Cohort 30% 20% 10% 0% Retail Office Multifamily Hotel Other Industrial

16 Property Location» Share of conduit loans secured by collateral in metropolitan statistical areas ranked 51 and higher increased to 28.7% in Q1 from 24.8% in Q4 50% Q2013 3Q2013 4Q2013 1Q2014 2Q % % of Cohort 30% 20% 10% 0% Top 10 MSA Top MSA MSA Rank 51+

17 CMBS Conduit New Issuance» Conduit issuance $10-15 billion each of last 6 quarters Billions $ Moody's Rated Non-Moody's Rated Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

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