Fitch Reports Early Refinances Up for U.S. CMBS 2.0

The CMBS market is robust, according to the latest report from Fitch Ratings, which notes it continues to see strong take-out activity in CMBS 2.0 collateral.
Huxley Somerville, Managing Director, Fitch Ratings

Huxley Somerville, Managing Director and CMBS Group Head, Fitch Ratings

The commercial mortgage-backed securities (CMBS) market is robust, according to the latest report from Fitch Ratings, which notes it continues to see strong take-out activity in CMBS 2.0 collateral.

Recent data shows that approximately $48.4 billion has been issued in 2014, with $24.8 billion since June. Fitch also notes that borrowers are often paying the premium of yield maintenance to take advantage of the persistently low interest rate environment.

“There’s a lot of capital available for mortgage loans. They are performing strongly, as expected,” Huxley Somerville, Fitch Ratings’ U.S. CMBS group head, told Commercial Property Executive. “Right now, the market is very strong because there is a lot of liquidity. There is also a lot of competition to provide that liquidity to borrowers, which is causing competition among originators to make the loans, and the standards have declined somewhat.”

According to the report, Fitch has seen a growing number of prepayments and an increase in the size of individual loans being prepaid during 2014 when compared to the prior three years.

“What’s happening is that the loans made several years ago were made on more of a conservative basis than today, and today you have value increases—purely a result of the market—and a stronger cash flow than a couple of years ago,” Somerville said. “People with the opportunity to prepay loans are doing the rational thing, as they can get more debt proceeds on a new loan today, thus getting more dollars to secure against property.”

It’s something that Somerville said is not a cause for concern at the moment.

The report shows that to date, 2014 has seen 23 prepayments (totaling $2.7 billion, with balances ranging from $1.5 million to $1 billion). This is a notable difference from the five loans from a single transaction with individual loan balances all below $6 million that occurred during 2011.

Additionally, Fitch reported 49 prepaid loans, 33 of which were prepaid with yield maintenance or with a premium and 16 that were prepaid at no additional cost, as they were in their freely pre-payable period.

“In addition to an uptick in CMBS 2.0 defeasance, early payoffs are emerging, some of which are taking place shortly after expiration of the lock-out period,” Somerville added. “Borrowers are often paying the premium of yield maintenance to take advantage of the persistently low interest-rate environment.”

The added costs associated with these pre-pays and defeasance are offset by the increased debt available due to net operating income growth, value appreciation and the often lower interest rate than that of the original loan. Such cash-outs raise the question of sustainability should we be nearing peak performance in certain markets and asset types.

Looking ahead, Somerville said Fitch expects to see a back-ended supply of CMBS. Toward the end of the year, that would mean more supply due to the refinancing that will start to occur in the third and fourth quarters.

“One trend that is really interesting and seems to be getting more extreme is the picking and choosing of rating agencies and different rating categories,” he said. “That’s a cause for concern, and I think investors are concerned of that occurring. That’s something that needs to be watched with interest.”