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Fitch to consider fall-back assumptions for CRE backed covered

Fitch is inviting issuers of commercial real estate-backed covered bonds to submit over the next three months historical foreclosure data to help the rating agency decide whether or not to apply increased generic market value decline assumptions or apply alternative, less conservative criteria.

Fitch image

Fitch, Canary Wharf

The rating agency on Thursday increased its market value decline (MVD) assumptions for European collateralised debt obligations backed by loans to small and medium-sized enterprises (SME CLOs), adjusting these by up to 10% for properties located in Spain and up to 5% for properties in other European countries.

Fitch believes that MVDs may differ between regulated cover pools and securitised pools in certain jurisdictions, but that additional data and analysis is necessary to support this concept. The rating agency will over the next three months gather additional data to confirm or dispute this assumption.

“During this period, Fitch invites all covered bond issuers with cover pools consisting of commercial real estate loans to provide historical foreclosure data,” it said on Thursday. “Once the data is gathered, Fitch expects to complete its analysis over the subsequent three months.

“Fitch will then determine whether to apply the MVDs directly from its SME CLO criteria to the relevant covered bonds or to opt for alternative MVDs based on the updated analysis.”

Susanne Matern, senior director at Fitch, told The Covered Bond Report that the rating agency has not come to any preliminary conclusions and is open to seeing what type and the level of data that issuers provide.

“We need to see what data we can get,” she said, “and if it is sufficient to derive issuer-specific or property type-specific assumptions for certain jurisdictions, or whether we have to use more conservative fall-back criteria.”

Revised assumptions for Spanish cover pools, based on a sample of commercial property repossessions, have already come into effect because Fitch believes that MVDs for commercial properties from Spanish lenders are similar for securitised pools and cover pools as valuation practises do not differ.

The rating agency said that if the revised SME CLO assumptions are applied to covered bonds featuring commercial real estate loan as collateral, breakeven overcollateralisation (OC) corresponding to prevailing ratings is expected to increase by up to 3%.

“The rating impact is expected to be limited as the OC Fitch relies on should in most cases be sufficient to buffer the increase in breakeven OC for the ratings,” it said.

The rating agency will continue to apply its current assumptions until additional data collection and analysis is completed.

For covered bonds backed by commercial real estate loans, Fitch generally applies SME CLO MVD assumptions in the absence of information enabling the agency to perform a stressed property market value calculation based on line-by-line data on property and loan level, or alternatively, the provision of historical foreclosure data enabling the agency to derive issuer and property type specific MVD assumptions.

Stressed property market values are determined by the type and amount of collateral, which is analysed by projecting the stressed property income at financing level. However, if only limited data is available, recovery values may be capped by generic MVD assumptions that are adopted from Fitch’s SME CLO criteria. In most cases these are higher than the MVDs calculated based on projected stressed rental income.