Fitch: Exchangeable Classes Could Thin New US CMBS Tranches

NEW YORK--(BUSINESS WIRE)-- The use of exchangeable classes in new CMBS deals may raise the likelihood that some classes could have thinner tranches. Fitch Ratings believes classes with tranche thickness below 1% (meaning the dollar amount of the class is less than 1% of the amount of the entire pool) could have a higher losses given defaults and therefore, increased rating volatility.

In recent years, Fitch-rated deals have generally been structured with class sizes exceeding 1% of the total pool. However, just last week Fitch released expected ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28, which has a series of noninvestment-grade exchangeable classes.

Classes E, F, G and H can be exchanged for corresponding classes. For example, class E-1 and E-2 certificates may be exchanged for a related amount of class E certificates. And, class E certificates may be exchanged for the ratable portion of class E-1 and E-2 certificates. Class E-1 is senior to class E-2. Class F, G and H, and their corresponding exchangeable classes, are structured in a similar fashion. There are other permutations of exchanges in the lower classes. All are sequential pay structures.

In this deal, exchanges could reduce tranche thickness. Classes F-1 and F-2 of this deal would see its tranche thickness fall well below 1% if it is exchanged from class F. Fitch has assigned class F an expected rating of 'B-sf' at 5.375% credit support and a tranche thickness of 1%. If it exchanged into class F-2 at 5.375% credit support and class F-1 at 5.875% credit support, each exchangeable class' tranche thickness will fall well below 1.0% of the pool. Fitch will not rate classes F-2 and F-1.

However, exchanges have a smaller impact on the other classes. For example, class E has an expected rating of 'BB-sf' at 6.375% credit support with a tranche thickness of 3.0%. This class is exchangeable into class E-2 at 6.375% credit support and a class E-1 at 7.875% credit support, both with tranche thickness of 1.50%. Fitch has expected ratings for classes E-2 and E-1.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160209006357/en/

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Source: Fitch Ratings

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