DBRS Requests Comment on Proposed Rating North American CMBS Interest-Only Certificates Methodology

DBRS, Inc. (DBRS) has today requested comment on its proposed methodology “Rating North American CMBS Interest-Only Certificates.” Comments should be received on or before February 3, 2017. Please submit comments to the following email address: Structured.Finance.Comments@dbrs.com. DBRS publishes all comments received on its website, except in cases where confidentiality is requested by the respondent.

The methodology is issued as a stand-alone methodology intended to cover interest-only certificates (IO or IOs) issued in commercial mortgage-backed security (CMBS) multi-borrower conduits; agency, single-asset/single-borrower and commercial real estate collateralized loan obligations; and resecuritization of real estate mortgage investment conduits. It reflects a movement from rating these certificates using their position in the waterfall to rating the referenced notional amount to account for a decline in payments as the transaction seasons and prepayments or losses occur. The DBRS IO rating is an opinion that addresses the likelihood that the notional amount of the IO will be adversely affected by collateral credit losses only. In CMBS transactions, credit losses are allocated first to the most junior CMBS bonds and, when realized, second to the principal amount of these bonds when written down.

For single-tranche, multiple-tranche and weighted-average coupon/stack IOs, the DBRS IO rating will reference the most junior rated class of bonds (the Reference Obligation), possibly adjusted upward by one notch. The rationale for adjusting upward by one notch is driven by the default probability of the underlying collateral, which incorporates both term and refinance defaults. Because CMBS loans have both term and refinance default risks that are weighted one-third toward refinance risk, the DBRS IO rating recognizes the muted impact on IOs by notching the IO rating up by one notch from the Reference Obligation rating.

DBRS deems this new methodology to be material, as it introduces a new way of rating CMBS IOs. All U.S. and Canadian CMBS transactions will be affected because the Reference Obligation varies with the IO’s position within the waterfall. An impact analysis that considers this change in approach on a majority of such certificates rated by DBRS indicates that potential rating actions could be either downgrades or confirmations.

In conjunction with the finalization of the methodology, DBRS will review all affected securities and take timely and appropriate rating actions under the new methodology, as warranted.

Notes:
DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.