Morningstar DBRS Publishes Final North American CMBS Multi-Borrower Rating Methodology and CMBS Insight Model

Morningstar DBRS finalized its North American CMBS Multi-Borrower Rating Methodology (the Methodology) and updates to the CMBS Insight Model (the Model).

This Methodology and Model present the criteria for which commercial mortgage-backed securities (CMBS)¿including multi-borrower conduit, agency, commercial real estate collateralized loan obligation (CRE CLO), small balance, and other transactions secured by pools of commercial mortgage loans¿credit ratings are assigned and/or monitored.

The Methodology and Model supersede the prior version published on December 13, 2024, and are effective as of April 9, 2025.

The Methodology and Model were published for comment and no comments were received; however, one question was received and is summarized below:

Q: Have the market ranks outlined in Appendix A been updated with the latest census and zip code data?
A: Yes. In this update to the Model, the Morningstar DBRS Market Rank data has been updated with the latest census data. In Appendix A, the charts in Exhibits 8 and 9 (showing the combined Morningstar DBRS Market Rank 7/8), and the example data for zip code 60607 in Chicago, reflect this update.

The updates to the Methodology and Model follow a review of historical data that is used to calibrate the Probability of Default and Loss Given Default regressions, and inclusion of updated performance data following the coronavirus pandemic. The framework for the Model largely remains the same; however, Morningstar DBRS has also expanded some of the categories or bins within the variables and/or removed variables that were identified to be 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 of less than 1.21x, while before there was only one. This has a negative impact on credit and is mostly impactful for CRE CLO transactions where the 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 Model over time. This is a nonmaterial change; no impact on credit.

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

-- The Model considers a defaulted loan's likelihood to transition into a significant loss, defined as 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, when compared with the typical agency sponsor as opposed to the broader 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. Meanwhile by interpolating the subcategories in loss space, Morningstar DBRS enables consumers of its stress-loss levels, and ultimately of its credit ratings, to develop better intuition of Morningstar DBRS' 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. Based on a model-to-model comparison, about 84% of outstanding credit ratings are not expected to be affected, approximately 15% are likely to receive a credit rating upgrade, and the remaining 1% are subject to credit rating downgrade actions, which may be highly dependent on certain concentrations. Morningstar DBRS is currently reviewing the book of all potentially affected transactions and expects to publish updates to its credit ratings for affected transactions within the next few weeks. Morningstar DBRS will not only take into consideration the impact of the Methodology and Model changes outlined herein, but will also bring in current performance data, updating pools for loan repayments and defeasance, realized losses, and updates to loans of concern. Transactions with little change from the most recent expanded review, or those considered in wind-down, where the predictive model is no longer a primary driver for credit view, may be fall into a category of having no impact, stemming from the proposed updates.

All comments received during the request for comment period have been published to the Morningstar DBRS website, 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