DBRS Requests Comment on North American CMBS Multi-borrower Rating and Surveillance Methodologies and CMBS Insight Model

DBRS is requesting comment on the proposed new “North American CMBS Multi-borrower Rating Methodology.” The methodology introduces a new model, the DBRS CMBS Insight Model, which will be used to generate loan level expected losses and base case pool losses along with the use of multiple ranges that vary based on rating categories. The multiple ranges will be used by DBRS to evaluate the adequacy of credit enhancement considering the expected base case pool loss and a given rating level.

DBRS is also requesting comment on the updated “North American CMBS Surveillance Methodology” where multiple ranges will be used in the surveillance process. In addition, DBRS has incorporated an additional analytical step to the current surveillance process where the DBRS CMBS Insight Seasoned Module will be run at three, five and seven years of seasoning. This additional step is supplemental to other surveillance procedures that are used to identify loans that may come under stress in the future.

The methodologies present the criteria for commercial mortgage-backed security (CMBS) multi-borrower conduit transactions (both U.S. and Canadian), agency transactions, small balance, seasoned loan transactions, resecuritizations and commercial real estate (CRE) collateralized loan obligations for which ratings are assigned and/or monitored.

Publication of the new methodology follows a lengthy review and testing of historical data sourced from the Trepp database. Over 56,000 loans that had fully cycled through loan maturity in CMBS issuance from March 2001 through December 2013 were utilized for the basis of the probability of default (PD) component. Approximately 10,000 loans issued between 1995 and 2015, with significant loss (defined as losses greater than 2%) were utilized to form the loss given default (LGD) metrics.

The following significant drivers of loan level PD are included in the CMBS Insight Model:

-- Property type
-- Loan-to-value (LTV; at issuance and at maturity)
-- Debt service coverage ratio
-- Occupancy rate
-- Tenant concentration
-- Time to largest lease expiration
-- DBRS Market Rank and metropolitan statistical area (MSA)
-- Interest-only periods

Significant drivers of LGD include:
-- Property type
-- DBRS Market Rank
-- MSA
-- Property age
-- Loan size
-- LTV at issuance

DBRS net cash flow (NCF), property quality and sponsor strength remain important inputs into the CMBS Insight Model.

The new methodology and model will bolster the transparency of our CMBS analytics from issuance through the life of each rated transaction. New features will be added to our CMBS analytics in response to investor requests. DBRS anticipates being able to disclose an expected loss figure for each CRE loan, in addition to an overall expected loss figure for each pool, which will be incorporated in future enhancements to the DBRS Viewpoint platform.

Enhanced reporting on market quality, already on Viewpoint, will be described in a DBRS Market Rank score. As described in the methodology, within a given MSA, this score ranks the quality of each market on a scale from one to eight. A score of eight represents the most liquid CRE markets.

The CMBS Insight Model enables DBRS to perform stress tests for macroeconomic events such as (1) property value declines, (2) property sector NCF declines, (3) market-specific stresses for markets that seem overheated and (4) property types that are experiencing stress, such as the retail sector.

The impact of the new methodologies and CMBS Insight Model including the CMBS Insight Seasoned Module, as applicable, on outstanding ratings is anticipated to largely consist of rating confirmations or upgrades, with the majority of upgrades concentrated in transactions that have four or more years of seasoning. Only a few bonds (less than 2.4%) are anticipated to show pressure of downgrades.

Comments should be received on or before March 18, 2019. Please submit your comments to the following email address: structured.finance.comments@dbrs.com.

DBRS publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

Upon request, DBRS will provide a detailed specification for the DBRS CMBS Insight Model to investors and other CMBS market participants as an initiative towards increased transparency.

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

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