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KBRA Releases Research – Conduit Subordination: Follow the Credit Metrics

via Business Wire

KBRA releases research on the current trends in CMBS conduit credit metrics and subordination levels.

Junior AAA subordination levels in conduit CMBS increased to 20.3% in 1H 2025, marking an increase of more than 10% from the full-year 2023 average of 18.4%. This trend is unsurprising, as average appraised loan-to-value (LTV) ratios have increased over four points to 56.6% during the same period. Notably, KBRA loan-to-value (KLTV) ratios for KBRA-rated transactions have also risen to 91.6% from 87.4%, while KBRA debt yield (KDY) has decreased to 10.5% from 11.1%. Overall, pools remain relatively concentrated in terms of loan diversity, with a continued high proportion of interest-only (IO) loans. Beyond deal-level metrics, the commercial real estate (CRE) market continues to face challenges from higher interest rates, weak office demand, and uncertainty stemming from the potential economic impacts of tariffs.

Barring any meaningful reversal in current trends, these deal dynamics and market factors suggest that credit enhancement (CE) levels are likely to hold steady or even increase from their current position. While KBRA continues to be an active voice in the market, our views may not be shared by all rating agencies. KBRA’s participation rate in conduit CMBS transactions has declined since 2023, and based on the current pipeline, we expect this trend to continue. This is primarily due to our views on preliminary CE levels, which are informed by lessons learned from the global financial crisis (GFC) and CMBS 2.0 performance. For example, our A stress levels incorporate insights gained from the GFC.

In this KBRA report, we examine historical conduit CE levels and highlight several trends that suggest subordination should remain stable—or even increase—on average.

Key Takeaways

  • Lessons learned from the GFC have helped CMBS 2.0 navigate market challenges. CE levels remain well above pre-GFC benchmarks, even though LTV ratios are nearly 15 percentage points lower in the post-GFC period.
  • The higher enhancements have helped KBRA ratings stability ratios remain above 99% for AAA and 91% for AA and contributed to minimal expected losses among classes initially assigned these ratings.
  • Transaction metrics trends such as leverage, loan and property concentrations, and IO loan payments indicate CE levels should remain at current levels or move higher.
    • Leverage trends—as measured by KBRA LTVs—are on the upswing with the average deal KLTV reaching 91.4% in 1H 2025 after hitting a post-GFC low of 87.4% in 2023.
    • Average conduit loan Herfindahl (Herf) scores, a measure of diversity, remain near all-time lows reached in 2023 as CRE origination has yet to fully recover following the Federal Reserve’s rate increases that began in 2022.
    • Office and lodging loan concentrations, which have a historically higher propensity to default relative to other property types, are beginning to trend upward with a combined concentration of 36.5% during 1H 2025 compared to 30.5% in 2024.
    • IO loan concentrations remain near all-time highs as the KBRA IO Index hovers close to 90% during 1H 2025.

Click here to view the report.

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About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

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