KBRA Releases Research – CMBS Rating Transitions: 13 Years In

KBRA releases a report that analyzes how its CMBS ratings assigned at issuance have performed from 2011 through April 2024. KBRA started rating CMBS in June 2011, and during the following eight years the environment for commercial real estate (CRE) was relatively benign and characterized by a steadily growing economy and low and/or declining interest rates. The markets then faced unprecedented pandemic-related disruptions in 2020, which immediately impacted the lodging and retail segments owing to a general halt in travel, stay-at-home orders, as well as a general reticence to be in indoor public spaces. While lodging handily recovered, the circumstances placed outsized pressure on weaker retail properties, and was followed by a rising inflationary and interest rate environment that seemingly occurred simultaneously with structural shifts in office usage. All these factors led to higher levels of negative rating activity over the last four years. However, over the 13-year study period, ratings have transitioned as expected, with investment-grade (IG) exhibiting higher stability, while non-investment grade (non-IG) ratings experienced higher levels of credit drift, much of which occurred in the last four years.

The study population includes CMBS conduits, single-asset single borrower and large loan (SASB/LL), Freddie Mac (Agency) multifamily securitizations, and CRE collateralized loan obligations (CLO). In total, KBRA has rated 713 transactions across these transaction types during the study period, assigning a total of 8,416 ratings. In the report, we examine the following: (i) lifetime rating changes, which captures the rating at issuance compared to the most current rating or the rating just prior to a withdrawal; (ii) rating activity on a yearly basis, which captures the number and proportion of affirmations, upgrades, and downgrades in each year; (iii) KBRA ratings stability ratio (KSR) at each rating category, which measures the proportion of ratings that have maintained their initial rating or have been upgraded; and (iv) magnitude of rating actions by rating category, which shows how much a rating has changed over its lifetime.

Key Observations

• Of the 8,416 ratings assigned across 713 transactions rated by KBRA since 2011, most have yet to experience their full rating life cycle. Currently, 77.8% of the assigned ratings remain outstanding.
• In total, 4.8% of the 8,416 ratings have been upgraded while another 9.2% have been downgraded. However, 50.4% of the initial ratings were AAA at the time of assignment and not eligible for upgrades.
• While the four deal types—conduits, SASB/LL, Agency, and CRE CLOs—have experienced rating upgrades, Agency and CRE CLOs have yet to have any downgrades.
• A vast majority (92.5%) of the downgrade activity has occurred since 2020.
• Between 2016 and 2019, the upgrade to downgrade ratio was 2.5x, while downgrades during 2020 to April 2024 have outpaced upgrades 3.7x.
• The overall KSR for the study population was 90.8%, with AAA at 99.1% and BBB at 85.1%.
• As deals season and loans reach their maturities, we observe lower KSRs, especially at non-IG rating categories. For example, the KSR was 17.2% for the B rating category among 2013 vintage transactions but was 97.3% for AAA within the same vintage, while the KSRs for the B rating category and AAA among 2019 vintage transactions were 89.9% and 99.8%, respectively.
• While downgrades have been meaningful over the past four years, rating defaults have been minimal, with only 0.4% of all ratings being downgraded to D. If we include downgrades to C, which we consider highly likely to incur a principal loss, the percentage rises to 1.4%.

Click here to view the report.

Related Publications

• KBRA’s Global Rating Stability and Transition Study: 2011-2023
• CMBS Loan Performance Trends: May 2024
• CMBS Trend Watch: April 2024

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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