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

DBRS Morningstar finalized its “North American CMBS Multi-Borrower Rating Methodology” (the Methodology) and CMBS Insight Model (Version 1.2.0.0) (the Model).

The Methodology and the Model present the framework for which DBRS Morningstar’s credit ratings on North American commercial mortgage-backed security (CMBS) multi-borrower transactions are assigned and/or monitored.

The Methodology and the Model supersede the prior versions published on March 16, 2023, and are effective as of November 3, 2023.

The finalization of the Methodology, including the Model, follows the conclusion of the request for comment (RFC) period that began on October 3, 2023. DBRS Morningstar received no comments during the RFC period.

DBRS Morningstar deems two of the updates to be material changes.

The first material update relates only to the analysis of certain loans in North American CMBS conduit and agency transactions. More specifically, DBRS Morningstar treats loans with five-year original terms and stabilized property cash flows (in conduit and agency transactions) as though they were 10-year loans with respect to their probability of default (POD) factors solely for the original loan term and interest-only (IO) period. The change reflects DBRS Morningstar’s analysis of the performance of commercial real estate (CRE) loans underwritten post Great Financial Crisis (post-GFC) and its observation that the five-year term of a CRE loan, in and of itself, is not a factor indicating increased risk of default in the post-GFC cohort. In addition, the lengths of the IO terms (IO terms) of loans with five-year original terms are mapped to 10-year terms proportionally, maintaining the relationship of the IO terms to the loans’ original terms for their respective POD factors. For example, DBRS Morningstar treats a 60-month original term loan with a 60-month IO term (so, a five-year original term, full-term IO loan) as a 120-month original term loan with a 120-month IO term (10-year original term, full-term IO loan.) This does not affect the analysis of CRE collateralized loan obligation (CRE CLO) loans by DBRS Morningstar.

The second material update relates only to the analysis of loans backed by multifamily properties in Freddie Mac Agency transactions (K-deals). With respect to the relevant loans, a POD factor of 80% is applied as an adjustment to the POD regression estimate. The update reflects the review of the stronger performance, in terms of delinquency, of agency multifamily loans relative to the historical multifamily cohort of predominantly non-agency multifamily loans on which the model was trained. This update will not affect DBRS Morningstar’s analysis of any other loan type in North American CMBS multi-borrower transactions.

The last of the three updates is not deemed material and is intended to provide additional clarity with respect to DBRS Morningstar’s analysis of pools with higher base-case pool losses. With this update, stressed pool-loss multiples are supplemented to include base-case pool losses higher than the current ranges captured in the methodology. Specifically, indicative multiples are introduced for base-case pool losses greater than 6%, with the previously stated multiples remaining unchanged. DBRS Morningstar has developed these stressed pool loss multiples by observing results of the prior CMBS Insight Model. The stressed pool-loss multiples are not expected to affect outstanding DBRS Morningstar credit ratings.

The material updates are expected to have a positive impact on the outstanding DBRS Morningstar credit ratings on Freddie Mac K-Series transactions, including ReREMICs of K-Series securities. The material updates are also expected to have a neutral or positive impact on the limited number of outstanding U.S. and Canadian multi-borrower conduit and small-balance transactions that include loans with five-year original terms that are currently rated by DBRS Morningstar.

The updates are not expected to have an impact on the outstanding DBRS Morningstar credit ratings on CRE CLO transactions.

All comments received during the request for comment period have been published to the DBRS Morningstar website, except in cases where confidentiality is requested by the respondent.

Notes:
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.