Borrower Level Hedging in CMBS Transactions: Moving the Cap Environment

This commentary explores recent examples of commercial mortgage-backed security transactions that saw a shift in borrower-level hedging agreements, which were renewed with higher cap strike rates.

While higher cap strike rates could mean worsening debt service coverage ratio levels for a transaction, DBRS Morningstar also considers mitigating factors such as funding of reserves or strong loan metrics to conclude its risk assessment of a transaction’s performance in the near future. As such, to determine whether a higher cap strike rate should result in a rating downgrade for a transaction, DBRS Morningstar analyses the mitigating factors as well as weaknesses specific to a transaction.