Fitch: Release Pricing Innovations Could Present CMBS Risks
OREANDA-NEWS. Innovations in commercial property lending that have seen traditional release pricing mechanisms modified in borrowers' favour could expose CMBS investors to greater idiosyncratic property risk, Fitch Ratings says.
Release pricing governs how much debt borrowers must repay if they dispose of individual properties over the term of the loan. Traditionally, lenders have required a fixed, pre-determined portion of the loan to be repaid on the sale or release of a property to ensure deleveraging and avoid exposure to a rump of lower-quality properties.
Competition between lenders has driven innovation in release pricing structures, including giving borrowers the ability to reduce release prices of remaining assets after property sales. This slows deleveraging and may even lead to partial reversal of prior deleveraging.
Where this innovation has appeared, debt structures have incorporated countervailing features that limit the portfolio owner and/or junior bondholder's ability to prolong returns, therefore protecting senior noteholders against excessive portfolio concentration.
However, we think that borrower-friendly release pricing structures could be reproduced in future CMBS deals where less attention is paid to whether such a structure is suitable for the underlying collateral. For properties that rely on a particular occupier or sector to sustain their value, this could leave CMBS investors exposed to greater idiosyncratic risk following property disposals than was apparent in the initial portfolio, undermining the benefit of portfolio diversity.