Fitch Says Outlook Change for Defeased CMBS Unlikely


Fitch Ratings said Friday that an outlook change to negative for “defeased” U.S. CMBS looks unlikely despite the use of government debt in defeasance and a recent revision of the sovereign outlook to negative.

The rating agency said it found that over half of the defeased collateral in Fitch-rated U.S. CMBS matures prior to the end of 2013, noting that unless there are material adverse shocks before then, a resolution of the sovereign rating’s negative outlook is not expected until late that year.

This means much of the collateral is likely to pay off before any potential rating action on the sovereign issue, according to Fitch.

Defeasance requires cashflows to be replaced using U.S. Treasury securities if refinancing occurs before the end of a specified period.

There are $8.4 billion of Fitch-rated CMBS maturing this year through 2013, which the firm indicated is a relatively small percentage of its rated population.

“Tranches with significant exposure to Treasuries via defeasance would be more directly linked to any action on the sovereign rating,” said Britt Johnson, senior director, Fitch Ratings, in an interview. “Where the defeasance is a smaller percentage (typically conduit deals where there is subordination available that could absorb losses), [ratings are] not as reliant on quality of defeased collateral.”

As previously reported, rated CMBS and RMBS typically are private-label deals and not government guaranteed. In the case of CMBS, there may be government exposure if there are defeasance requirements.

Fitch early last week revised the rating outlook on the RMBS ratings tied to the sovereign to negative.

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