DBRS Morningstar Requests Comments on Proposed Updates to North American CMBS Multi-Borrower Rating Methodology and North American CMBS Insight Model Version 1.0.4.0

DBRS Morningstar is requesting comments on the proposed updates to the “North American CMBS Multi-Borrower Rating Methodology” (the Methodology) and North American CMBS Insight Model version 1.0.4.0 (the Model), which may, upon the close of the Request for Comment period, supersede the version published on March 26, 2021. This Methodology and Model are the criteria for which North American commercial mortgage-backed securities (CMBS) multi-borrower transaction ratings are assigned.

The Methodology applies to North American structured finance transactions secured by a pool of commercial real estate (CRE) assets, including conduit and CRE collateralized loan obligations (CRE CLOs). The proposed updates to the Methodology include clarifying language around property site visits when a physical site visit may not be possible, updates to borrower strength and property quality naming conventions to be consistent with the Model categorization, and clarifying language as it relates to CRE CLO analysis and modeling approach where there are ramp loans, reinvestment loans, and/or a full blind pool, inclusive of the rating agency condition for new loans contributed to a pool, in addition to other editorial clarifications.

The Methodology also includes a description of the Model, including the variables that affect (in a statistically significant manner) a loan’s probability of default (POD) and loss given default (LGD). The updates to the Model are deemed material because of differences between the Model’s loan-level POD and LGD estimates and the proposed Model’s corresponding estimates.

The proposed updates to the Model based on additional review of data are described below:

(1) Change of expression of a POD input surrounding the largest lessee expiration to be a percentage of lease term to loan term.
(2) Absorption of the student housing property type in multifamily property type for LGD.
(3) Inclusion of a differentiation for judicial and non-judicial foreclosure states as a factor of LGD.
(4) Imposing a minimum loan-level POD value, consistent with a AAA rating level, and a minimum loan-level LGD, consistent with a minimum observed in historical liquidations.
(5) Introduction of As-Is and Stabilized NCF Haircut adjustments unique to CRE CLOs.
(6) Introduction of nonlinear mapping of the CRE CLO Business Plan Score to provide more nuanced differentiation.
(7) Introduction of an equidistant interpolation for (high) and (low) ratings within the relevant rating categories.

A more detailed explanation of the updates and their rationales can be found in the commentary “Proposed Updates to DBRS Morningstar’s North American CMBS Insight Model” at https://www.dbrsmorningstar.com/research/402804, which provides a detailed view of the existing Model compared with the proposed Model updates. Upon request, DBRS Morningstar provides a detailed specification for the DBRS Morningstar CMBS Insight Model to investors and other CMBS market participants as an initiative toward increased transparency.

While the proposed updates are collectively deemed to be a material change to the model, DBRS Morningstar expects minimal to no ratings impact on the 498 outstanding multi-borrower transactions, comprising more than 5,000 rated securities. Based on a rating impact analysis for the Model, including the inputs and assumptions used at the time of transaction issuance, the average impact on the loss stresses of a AAA-rated tranche is less than 1% thereof (representing a nominal fraction of a notch). Furthermore, the comparable average impact with respect to the other rated tranches is progressively less when moving down the rating scale. As collateral performance factors become increasingly more important during the life of a transaction, the rating impact of the Model change on outstanding transactions is expected to be less than it would have been at the time of issuance. Accordingly, rating actions to be taken at the conclusion of the Request for Comment period are not expected to be driven solely by the proposed updates.

Comments should be received on or before October 21, 2022. Please submit your comments to the following email address:

[email protected]

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

Provided no comments are received, DBRS Morningstar expects to implement this Methodology and Model update on November 4, 2022.

Notes:
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].