NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Barbells in U.S. CMBS Lift Credit Risk
Credit barbelling is becoming more commonplace in U.S. CMBS, which may place transactions at much greater risk for losses over time, according to Fitch Ratings in a new report.
Barbelling is a wide dispersion of credit risk within a transaction, and it is becoming more obvious especially as deal size shrinks according to Managing Director Eric Rothfeld. 'Barbelling began to surface within Fitch's loan metrics last year and it is showing up more frequently in 2016,' said Rothfeld. A barbell in credit creates more downside risk for a CMBS deal. 'The higher the expected loss and the greater the number of loans with high expected losses, the larger the potential effect on deal performance,' said Rothfeld. And lower leverage amongst other loans in the pool will not necessarily offset this barbelling risk. As such, Fitch assigns higher credit enhancement levels at each rating level.
Fitch's increased cash flow haircuts in 2015 and 2016 are among the contributors to the barbell in credit. Common drivers behind the increase in haircuts were loosening issuer standards for acceptable revenue (master lease rents, rents from expiring tenants) and simply a different perspective from Fitch on the current point in the property cycle with contrasting assumptions on market rents and leasing costs.
A notable example is two recent Fitch-rated deals that launched and priced within days of each other (MSBAM 2016 C28 and WFCMT 2016-NXS5). While the pools look very similar using average credit metrics, they have very different credit profiles when observed more closely and Fitch credit enhancement reflects this difference.
'Barbells in U.S. CMBS Lift Credit Risk' is available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at www.fitchratings.com.