Morningstar DBRS Requests Comments on Updates to its North American CMBS Multi-Borrower Methodology and CMBS Insight Model

Morningstar DBRS is requesting comments on the proposed update(s) to the North American CMBS Multi-Borrower Rating Methodology (the Methodology) and its CMBS Insight Model, which may, upon the close of the Request for Comment period, supersede the version published on December 13, 2024.

The updates to the Methodology and CMBS Insight Model follow a review of historical data that is used to calibrate the Probability of Default (POD) and Loss Given Default (LGD) regressions and inclusion of updated performance data following the pandemic. The framework for the CMBS Insight Model largely remains the same; however, Morningstar DBRS has also expanded some of the categories or bins within the variables and/or removed variables no longer impactful.

A description of the updates is as follows:
-- Debt service coverage ratio (DSCR) remains a leverage variable in the model and Morningstar DBRS has now expanded the DSCR bins to address DSCRs that may be lower than 1.21 times (x) at issuance. There are now five DSCR bins below 1.21x where before there was only one. This has a negative impact on credit and is mostly impactful for commercial real estate collateralized loan obligation (CRE CLO) transactions where DSCR may be lower than 1.21x at issuance.

-- Morningstar DBRS Market Ranks 7 and 8 have been combined into a single Morningstar DBRS Market Rank 7/8 to reflect observed performance data. This has a negative impact on credit.

-- The interest rate or note coupon loan feature has been retired as it had become neutral within the CMBS Insight Model over time. This is nonmaterial change; no impact on credit.

-- The Interest-Only (IO) bin for loans with 84 or more month IO periods was matched to the next lower IO bin (25-84 IO months) in order to better match observed default frequency. This has a moderately negative impact on credit.

-- The CMBS Insight Model considers a defaulted loan's likelihood to transition into a significant loss, defined by a loss greater than 2% of the original loan balance. This transition likelihood was found to be lower in the updated data set for both agency and nonagency transactions. Specifically for agency transactions, Morningstar DBRS considers strong sponsorship to be a contributing factor in this lower transition likelihood. As a result, Morningstar DBRS may limit additional credit because of strong sponsorship in agency transactions to loans with stronger sponsorship when compared with the typical agency sponsor, as opposed to the broader commercial mortgage-backed securities (CMBS) universe. This has a positive impact on credit for nonagency transactions and a net positive impact on credit for agency transactions, after accounting for the negative impact resulting from the higher threshold for strong sponsorship.

-- The Stressed Pooled Multiples at the (high) and (low) credit rating subcategories have been linearly interpolated to address relative tranche thickness disparities. Morningstar DBRS continues to use the Morningstar DBRS Idealized Default Table at the main credit rating categories to maintain the benefits of a consistent risk measure, while by interpolating the subcategories in loss space, Morningstar DBRS enables consumers of its stress loss levels, and ultimately of its ratings, to develop better intuition of our levels and align expectations of equidistant subcategories with its actual levels. This may have a positive or negative impact on credit.

-- Lastly, Morningstar DBRS has retired the Seasoned Loan Module, considering stronger, more timely monitoring systems are in place. This is a nonmaterial change with no impact on credit.

Morningstar DBRS expects the cumulative changes will result in changes to certain outstanding credit ratings. While there are both positive and negative impacts on credit with the changes described above, the cumulative change is generally viewed as positive for the more senior bonds in the capital stack.

As a result of the material change, Morningstar DBRS expects to have limited impact on outstanding credit ratings. About 84% of outstanding credit ratings are not expected to be affected, approximately 15% are likely to receive a rating upgrade, and the remaining 1% are subject to downgrade actions, which may be highly dependent on certain concentrations. Comments should be received on or before March 31, 2025. Please submit your comments to the following email address: sfcomments@morningstar.com

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

Notes:
Morningstar DBRS methodologies are publicly available on its website https://dbrs.morningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.