Loss Expectations for CMBs - Fitch

Losses on securities backed by 2006-2007 commercial mortgages are likely to remain small even if the economy climate worsens significantly, according to a new analysis by Fitch ratings.

Fitch characterizes the current situation as a “mild stress” scenario most similar to the 2001 recession. Losses are projected at 2.5%, with BBB- securities the highest tranche affected.

Under a moderate stress scenario more like the 1991 recession, losses would rise to 3.6% and affect securities up to the BBB+ level.

In a severe stress situation comparable to the 1945 recession (with an annual economic contraction of 11%), losses would amount to 8.8% and affect securities up to AA+. However, even in this scenario, AAA securities would be unaffected.

When applying any of three increasingly severe macroeconomic stresses to 2006 and 2007 U.S. CMBS Fitch-rated transactions, ‘AAA’ rated classes incur no losses.

Fitch sees the downside risk as the moderate stress scenario and expects few near or medium-term losses.

However, the probability of defaults is expected to rise from the historical average of 7.9% to 13.7%, 17.2% and 34.5% under the mild, moderate and severe scenarios, respectively.

Fitch’s full Stress Test is available for purchase.