S&P Issues Report On Differences Between CMBS and Lease Backed Deals

S&P Credit Ratings - September 18, 2003

Non-U.S. issuance of CMBS has surged since 1999, from Europe to Japan and Australia to Canada, reaching approximately €30 billion in 2002. The increase in issuance has been marked by a growing and more varied set of borrowers seeking to leverage real estate assets.

As the market develops, CMBS technology is being adapted to securitizations in which the risk profile is determined primarily by the originator's business operations, rather than by the property's characteristics. Although the property component in a transaction's overall risk profile may be significant, it is dominated in the opinion of Standard & Poor's by the operating risks associated with a going concern.

This article examines the key differences in rating approach between standard CMBS transactions and these property intensive corporate securitizations.

In rating standard CMBS debt, Standard & Poor's analysis places emphasis on solving for the level of overcollateralization that supports a specified rating. In rating property intensive corporate securitizations, Standard & Poor's seeks to maximize the value added of a number of variables including business risk, overcollateralization, amortization schedule, final maturity, and capital structure. A property financing whose cash flows come from a single tenant, for example, may have its credit rating limited or linked to the credit rating on the existing tenant. These transactions are typically called "credit lease transactions."

For example, standard CMBS transactions typically have an expected maturity of between five and seven years, with a legal final maturity two or three years later. Property intensive corporate securitizations, in contrast, may extend over far longer periods; a 20-year legal final maturity is not unusual.

The different rating approaches are likely to affect both the capital structure and the highest credit rating that a securitized property financing can achieve.

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