KBRA Releases Research ? Conduit CMBS Default and Loss Study: Spotlight on Five-Year Loans
KBRA releases a CMBS default and loss study that examines conduit 5-year loans performance. Given the current rate environment and capital market volatility, 5-year fixed rate loans have become a more popular finance option for borrowers. In fact, the first CMBS 2.0 conduit to solely comprise 5-year loans launched in February 2023, and KBRA is aware of other transactions that may launch in the near future. To provide an indication of how these loans have performed historically relative to their 10-year counterparts, we turned to our most recent Conduit CMBS Default and Loss Study, published in November 2021. The study population includes 6,007 5-year loans and 85,640 10-year loans that were originated for securitization between 1995 and Q2 2020.
Within that loan population, the cumulative default rate for 5-year loans was 25% (1,502 defaulted loans) compared to 16.7% (14,264) for 10-year loans. Breaking down the default rate by term and maturity defaults, the 5-year loans, as expected, had a lower cumulative term default rate compared to the 10-year loans (8% versus 12.5%, respectively). However, the 5-year loans had a meaningfully higher cumulative maturity default rate of 17% relative to the 6.3% rate for 10-year loans. Despite the higher delinquency rate, the study found 5-year loans performed much better from a loss perspective. The average loss severity of all defaulted and resolved loans was 22.8% for 5-year loans compared to 30.2% for 10-year loans.
Additional Findings
- The overall loss rate for the 5-year loan population was slightly higher at 4.9% versus 4.6% for the 10-year loans.
- By property type, all 5-year loans had lower term default rates (except multifamily) and higher maturity default rates (except health care) compared to 10-year. This contributed to multifamily's 5-year cumulative default rate (term plus maturity) of 26.1% being the most different compared to the respective 10-year rate (13.4%) relative to other property types, where the 5-year and 10-year rates were closer.
- Resolution times were generally in line with each other, with 5-year loans averaging 23.6 months compared to 23.4 months for 10-year.
- There was a meaningful difference among the securitization vintages of the two populations, with 5-year loans more concentrated (56.8%) in the five years (2003-07) leading up to the global financial crisis (GFC) compared to 10-year loans (42.1%). These vintages accounted for 82.8% of the 1,502 5-year loan defaults compared to 55.9% of the 14,264 10-year loan defaults. If these years were excluded from the population, the 5-year cumulative default rate (11.1%) would actually be lower than that for 10-year loans (12.7%).
- Over 92% of the 5-year loans have gone through their full life cycle compared to the 10-year study population, where only 77.5% have been paid off or resolved. When focusing only on loans that have been fully paid off or resolved, the 5-year loan default rate remains at 25.1%, while the 10-year cumulative default rate increases to 18.7%.
Despite some meaningful differences between 5-year and 10-year loan performance over the study period, the results are influenced by factors such as the distribution of when loans were originated, composition by property type, and the various economic cycles each loan encounters. Recent originations of 5-year and 10-year loans may not experience the same relative performance as that observed over the life of the study period, which covers performance data from 1995 to 1H 2021.
Click here to view the report.
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About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
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