DBRS Publishes Updated European CMBS Rating Methodology

DBRS Ratings Limited (DBRS) has today released an update to its “European CMBS Rating Methodology.” The premise of European CMBS is to transfer the credit risk in a portfolio of commercial real estate mortgages from the originating entity to bondholders. In the simplest sense, the bondholders will be repaid based on receipt of mortgage payments that are themselves funded through free cash flow from the commercial real estate properties that serve as security for the mortgages and via a successful refi¬nance of the mortgage at maturity or enforcement proceeds following a default. The property type, collateral quality, market position and tenancy are key variables that DBRS considers when looking at the ability of the property free cash flow to fund the mortgage liabilities, and therefore the Issuer’s ongoing obligations under the rated debt it has issued, as well as the ability of the portfolio to either be refinanced or sold to ensure that the rated debt can be repaid at maturity. Structural features may fill the potential gaps or deficiencies in property cash flow over the life of the loan and at the loan’s maturity, as well as insulate the transaction from potential interest rate or currency risk.

In this publication, DBRS lays out its European CMBS Rating Methodology and the asset-specific analyti¬cal procedures to which it adheres. There have been no material changes to the DBRS approach to rating European CMBS since the methodology was most recently published in November 2012; however, this publication does update the methodology to better reflect certain common terms and practices in the market, as well as to add references to DBRS’s “Unified Interest Rate Model for European Securitisations” and “Derivative Criteria for European Structured Finance Transactions.”

DBRS does not deem the methodology update to be material and does not expect any rating actions as a result of this update.

The full methodology providing additional analytical detail is available by clicking on link under Related Research at the right of the screen or by contacting us at info@dbrs.com.