(The following statement was released by the rating agency)
Oct 02 - OVERVIEW
-- Of our European CMBS rating actions in August, 72 downgrades occurred--relating to creditworthiness, loss expectations, and cash flow disruptions.
-- The dominance of negative rating actions is likely to continue, with cash flow disruptions increasing.
-- Two loans entered our delinquencies index, raising the delinquency rate for euro-denominated loans to 20.42% from 20.11%.
-- Weak overall performance extended to our special servicing index, as two loans entered the index in August due to maturity payment defaults.
Negative rating actions pervaded Standard & Poor's Ratings Services' index in August 2012, as it downgraded 72 classes of commercial mortgage-backed securities (CMBS) notes, and upgraded two.
According to our September 2012 European CMBS monthly bulletin, this split has persisted throughout 2012 so far, when we downgraded a total of 301 CMBS notes, versus only ten upgrades.
Credit analyst James Belchamber said "Most of these downgrades resulted from deteriorating creditworthiness, loss expectations, and cash flow disruptions. Further, we consider that cash flow disruptions are likely to continue to affect CMBS transactions in the near term,"
In August 2012, weak collateral performance led to increased loss expectations and a greater likelihood of interest shortfalls. These factors account for most of our negative rating actions in that month.
Mr. Belchamber stated: "In our opinion, principal loss expectations and decreasing relative creditworthiness will endure, as borrowers' ability to refinance remains restricted." The number of rating actions we take has tended to fluctuate in tandem with standard reporting periods--hitting peaks in February, May, and August, with another expected surge following the upcoming October reporting period.
Of the rating actions we have taken in 2012 so far:
-- Deteriorating creditworthiness and loss expectations represented 80% of our downgrades, which were prompted by updated assessments of likely recoveries and declining asset values.
-- Rating actions related to cash flow disruptions accounted for 12% of our downgrades--resulting from declines in rent, borrower insolvencies, and liquidity availability to cover projected shortfalls, among other issues affecting proceeds available to cover note interest.
"We expect cash flow disruptions to become an increasing issue for transactions, due to deteriorating loan performance and the rising number of loans entering special servicing," said Mr. Belchamber.
"We consider that the factors likely to impair cash flow and constrain performance are decreasing available incomes, increasing costs and fees, and structural features--such as appraisal reduction mechanisms, which reduce available liquidity in transactions," he concluded.
RELATED CRITERIA AND RESEARCH
-- European CMBS Monthly Bulletin (September 2012): Downgrades Hit Annual High On Lower Recovery Expectations, Sept. 28, 2012