Strategists emphasize the importance of remaining up-in-credit
Strategists at the Bank of America (BofA) found credit rating downgrades on commercial mortgage-backed securities (CMBS) reached their highest number in “recent memory”, hitting 121 tranches from 40 deals. Many of the downgrades were tied to Fitch Ratings’ ongoing review of the CMBS bond market.
A Bloomberg report noted the ratings company has downgraded or warned of underperforming offices, retail locations, and hospitality properties or portfolios. By September, 188 bond downgrades and 15 upgrades had been recorded by the BofA.
The BofA said further pressure on the CMBS sector could come from the National Association of Insurance Commissioners’ (NAIC) annual risk-based capital review. The annual review could result in standards in the insurance industry that could influence what insurance companies buy.
What are the findings of the strategists?
“Although in practice many insurers manage to multiples of their RBC requirements, CMBS bondholders across investor types still regard changes in NAIC designation categories with caution,” BofA strategists Alan Todd and Henry Brooks noted. They said designations “can potentially result in insurance company selling in the event the re-classification results in too significant of a required increase.”
The strategists have recommended that investors remain up-in-credit and should take a “judicious approach” to due diligence on any mezzanine credit.
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