The FINANCIAL — Hong Kong/Tokyo-18 July 2011: Fitch Ratings said that 22 Japanese CMBS tranches were downgraded in Q211 and a further three tranches are currently on Rating Watch Negative (RWN).
No rating actions were taken on Fitch-rated Japanese RMBS or ABS transactions during the quarter.
"The downgrades of Japanese CMBS were driven not only by downward revision of property valuation but also by the reduced likelihood of full principal repayment as the time to legal final maturity becomes shorter, especially for the tranches with high investment grade ratings, and regardless of their low loan-to-value ratios," says Naoki Saito, Director in Fitch's Japanese Structured Finance team.
The downward revision of property valuations reflects the deterioration of property cash flow or reduction in property sales target values by servicers.
In certain transactions, interest deferrals caused by the payment of a large special servicing fee also resulted in negative rating actions. This is because the special servicing fee relating to the sales of the properties backing the defaulted loan has been deducted from the fund that pays the interest, leading to an interest shortfall.
Fitch notes that three tranches from two transactions were upgraded in Q211, reflecting principal repayment on a sequential basis.
Three tranches from another two transactions were placed on RWN during the quarter. This reflects uncertainty over the timing of full principal repayment as well as the possibility of loss due to the payment of the special servicing fee, assuming that the underlying loans default and the workout is completed shortly after default. The RWN on 20 other tranches was resolved during the quarter.
In the Japanese CMBS sector, approximately 20% of rating Outlooks are currently Negative, down from a third 12 months ago. The Outlook for ABS and RMBS is predominantly Stable.