Aug 5 (Reuters) - (The following statement was released by the rating agency)
The size of junior ‘AAA’ tranches is shrinking as credit enhancement increases in new U.S. CMBS deals, according to Fitch Ratings.
As U.S. CMBS ‘AAA’ credit enhancement has increased in 2013 due to a combination of increased leverage and, more recently, increased concentration, investors should take note that the junior or natural ‘AAA’ class size is ‘thinning’. This increases the risk of lower than expected recovery on the tranche should a default occur.
Fitch rates to the junior ‘AAA’ level (ranging from 21% to 24% in recent deals). If junior ‘AAA’ credit enhancement continues to increase and the super-senior ‘AAA’ level remains at a 30% attachment point, the loss given default may grow more rapidly than investors expect.
Fitch would not be surprised to see super-senior investors look for subordination levels to increase in order to achieve a similar cushion between the junior and super-senior credit enhancement levels like they saw in earlier 2.0 deals.
Additional information is available in Fitch’s weekly e-newsletter, ‘U.S. CMBS Market Trends’, which also contains recent rating actions and an overview of newly released CMBS research, including Fitch presales. The link below enables market participants to sign up to receive future issues of the E-newsletter: