DBRS Updates Pari Passu Index for Loans in CMBS 2.0
CMBSDBRS, Inc. (DBRS) updated its Pari Passu Index for loans in transactions issued after 2010. A portfolio of these loans has been created and shared on DBRS Viewpoint (http://viewpoint.dbrs.com/#!/explore?p=1412), a CMBS interactive platform that will instantly allow users to see their exposure to pari passu loans. The volume of pari passu loans has increased significantly in the last two years. There are about 880 pari passu pieces with total issuance balance of $44.7 billion in 2016 and year-to-date 2017, which is greater than the total number for the prior years with 660 pieces and $44.2 billion between 2011 and 2015. In 2016, there was an unusually large amount of pari passu notes contributed to commercial mortgage-backed security (CMBS) transactions with over $23 billion (29% of total issuance) of loans and close to 500 pieces. The trend for 2017 is similar: As at the end of October, 33% of the total issuance for the year thus far was contributed by pari passu loans with $20 billion and more than 380 pieces.
This structure is an effective means by which originators can make large commercial real estate loans, and CMBS issuers and investors can diversify single-loan concentrations; as such, pari passu loans tend to be significantly larger and are concentrated in more liquid property types and markets. Property type majorities include office and retail (mostly regional malls). In addition, the DBRS market type for the location of the properties is typically strong, with urban markets comprising 58% and suburban markets comprising 25% of the total pari passu loans contributed to CMBS transactions since 2010. This is a stronger concentration in highly liquid urban markets than traditional multi-borrower conduits.
Pari passu loans are ultimately controlled by one pooling and servicing agreement and therefore one special servicer. Any loss associated with these loans should theoretically be distributed pro rata among the various pari passu notes contributed to various CMBS transactions. In reality, servicers and/or trustees sometimes apply different loss expenses to different tranches of the same collateral in different CMBS transactions. DBRS also observes occasional financial reporting discrepancies across transactions with pieces from the same pari passu loan, despite the fact that financial metrics should be the same for all notes of like payment priority. As of October 2017, 64% of the outstanding pari passu loans have reported YE2016 financials. This is relatively low as compared with the remainder of the CMBS universe, which showed a YE2016 reporting rate of 77% as of October 2017, suggesting part of the issue may be in distributing the information for all pieces to the various servicers for the transactions in which the pieces are held. DBRS plans to explore this in further detail in the near term.
DBRS expects to update this Pari Passu Index and will also update the shared portfolio in DBRS Viewpoint (http://viewpoint.dbrs.com/#!/explore) again in 2018, as more CMBS transactions come to market as the trend to have pari passu loans in multi-borrower conduit transactions does not seem to be slowing down.
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All figures are in U.S. dollars unless otherwise noted.
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