As published in Zero Hedge, where their tag line signals the sentiment ……  “on a long enough timeline, the survival rate for everyone drops to zero,” it is reported that the result of the stress test in the just published S&P “Scenario Analysis: Standard & Poor’s Expects the Downgrade Risk To Be High For Recent-Vintage U.SCMBS Transactions” at:

• 20% estimated losses for 2007 Commercial Mortgage Backed Securities (CMBS) ….

• With an added 16% loss for Whole Loans.

Here is what the S&P rating agency had to say about the methodology and summary of their analysis:

• Skewed risks …. The economic recession combined with the absence of readily accessible financing in the capital markets has, in our opinion, skewed the credit risks related to the performance of CMBS sharply to the downside, and far in excess of what we expected at origination or in our prior scenario analysis. As a result, our baseline (or expected) case now reflects a more severe recession, with a peak unemployment rate forecast of 9.8%.

• Downward spiral …. Since September/October 2008, we’ve witnessed significant deterioration in the credit performance of the CMBS transactions we rate. Our scenario analysis tests the resilience of our ratings on a loan-by-loan, deal-by-deal basis while factoring in the current and expected economic environment.

• No Guarantees … Through our scenario analysis, we intend to provide guidance on our expected future rating transitions. However, due to the high number of estimates and assumptions involved and the presence of loan-specific issues such as, among other things, in-place leases and debt structure, we cannot guarantee that the losses we project represent a measure of future rating changes.

These are S&P’s key results:

• Overall, we expect wide dispersion in performance between different vintages of CMBS, and even between particular deals within those vintages.

• Again, keep in mind that this is an analysis for CMBS. For whole loans the cumulative losses will likely result in substantially worse outcomes due to a majority of the loans having shorter maturities (the refi market is closed), being Interest Only initially and soon converting to amortizing, and generally lower DSCR ratios (at or below 1.0x).

• The impact of term and maturity defaults will likely add another 16% in lifetime losses for the 2007 vintage, causing total combined losses to reach just under 40% and declining ratably by older vintage.

For full analysis, read all the details, up close and very personal …

Tags: CMBS, Commercial Mortgage Backed Securities

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