CMBS loan diversity has hit its lowest level since 2003 according to a new report from Moody’s Investor’s Service. This poses risks to investors in the event of multi-notch downgrades and rising delinquency rates. As a result, Moody’s is calling for higher subordination levels on low diversity deals.
According to analysis utilizing the Herfindahl index, average CMBS deals in the third quarter were effectively comprised of fewer than 50 loans. The drop in diversity is caused by the current overall drop in CMBS deal volume and the conflicting needs of buyers. “Senior bond buyers tend to have a different perspective on diversity than b-level buyers,” said Tad Philipp, co-head of the CRE finance division. Loan diversity often suffers when pools are restructured to suit the more concentrated needs of b-piece buyers.
The call for higher subordination levels echoes a similar statement made by Moody’s in April. After implementing higher subordination levels, Moody’s saw its resulting CMBS deal volume drop from 75% to 25%. Since then, Moody’s has regained about half of this volume.