OREANDA-NEWS. February 16, 2015. Declining U.S. CMBS deal metrics in the last quarter are setting the stage for higher credit enhancement levels in 2015, according to Fitch Ratings in its latest weekly U.S. CMBS newsletter.

This after a fourth quarter that saw a sizeable jump in Fitch quoted credit enhancement for 'AAA' (up 103 basis points) and 'BBB-' rated CMBS tranches (32 bps higher). Driving Fitch's increase in CMBS credit protection were deals that had poorer debt service coverage ratios (DSCRs) and contained more interest only loans. In fact, IO loan exposure in fourth-quarter 2014 (4Q'14) was 40% higher than 2013 and now stands at 71.5%. Offsetting these negative factors were Fitch LTV remained stable from the previous quarter and there were less loans with additional debt.

With the focus on 'BBB-' rated tranches, it should be noted that in the majority of the eight deals Fitch rated in 4Q'14, Fitch's levels were the constraining factor or Fitch was not asked to rate the 'BBB-' tranche at all. In fact, in the three deals with higher than expected 'BBB-' credit enhancement levels, this was because the issuer increased it to ensure minimum tranche thicknesses.

One fact hidden in the 2014 new deal metrics that bears closer scrutiny this year is the increase in subordinate debt. While the percentage of the pool using sub debt dropped by year end, the dollar amount of debt on loans that had sub debt increased.

Additional information, including a spreadsheet with all 2014 Fitch metrics, is available in Fitch's weekly e-newsletter, 'U.S. CMBS Market Trends', which also contains recent rating actions and an overview of newly released CMBS research, including Fitch presales and Focus reports. The link below enables market participants to sign up to receive future issues of the E-newsletter:

'http://pages.fitchemail.fitchratings.com/CMBSMktOptin/'