Fitch said in a report Monday the thinner tranches in this category increase on the class if a default occurs. The report indicates that the thinning in the junior AAA CMBS classes results from increased leverage as well as more recent increased concentration risk in deals.
Fitch rates to the junior AAA level (ranging from 21% to 24% in recent deals), the report said. If junior AAA credit enhancement continues to increase and the super-senior AAA level remains at a 30% attachment point, the loss given default may grow more rapidly than investors expect.
Fitch would not be surprised to see super-senior investors look for subordination levels to increase in order to achieve a similar cushion between the junior and super-senior credit enhancement levels like they saw in earlier 2.0 deals.
When asked if the trend is a concern that could lead to negative rating actions, Eric Rothfeld, managing director, Fitch, returned a written statement to this publication saying, “Thinner classes are something investors should be cognizant of.”