Small-ticket commercial mortgage-backed securities are gaining attention as small commercial property lending becomes a growing segment for the nonbank lending sector. For these lenders, securitization serves as a crucial source of funding.
In this report, S&P Global Ratings explains its analytical approach to assessing the small commercial property loans included in collateral pools backing Australian and New Zealand structured finance transactions and answers some frequently asked questions.
Frequently Asked Questions
What are small-ticket CMBS?
Small-ticket commercial mortgage-backed securities (CMBS) transactions typically include loans secured by small commercial properties and residential properties. The small commercial property loans included in these transactions generally resemble the loan features of residential property.
For example, the loan is made to small business rather than large organizations, and the loan size and valuation process is similar to that of residential property lending, as opposed to a large office building and other large commercial properties. The loan originator assesses the ability to repay the loan using the same method applied to residential loans. The property types include office, industrial, retail, and rural.
How does S&P Global Ratings analyze commercial real estate loans in Australian and New Zealand small-ticket CMBS transactions?
The factors that affect borrower performance of small-ticket commercial properties resemble those of residential properties, such as loan size, borrower type, and loan-to-value (LTV) ratio. Consequently, we analyze the pool by borrowing concepts and assumptions from our global residential mortgage-backed securities (RMBS) criteria, and amending to reflect the risks in commercial lending.
Small commercial property types potentially present greater risk than residential properties. Accordingly, we typically apply adjustments to our default frequency and loss severity assumptions compared with our usual assumptions for residential assets (see table 1 and table 2).
For example, we apply higher market value decline (MVD) assumptions because we believe that the commercial property sector has historically demonstrated greater volatility in capital values than residential property.
Table 1
| WAFF And WALS for the current small-ticket CMBS transaction ratings | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Transactions | 'AAA' (sf) rating* | 'B' (sf) rating* | ||||||||||||
| WAFF (%) | WALS (%) | CE (%) | WAFF (%) | WALS (%) | CE (%) | |||||||||
| Think Tank Commercial Series 2022-3 Trust | 29.30 | 85.22 | 25.00 | 3.95 | 41.54 | 1.70 | ||||||||
| Think Tank Commercial Series 2023-2 Trust | 32.14 | 74.19 | 23.90 | 4.39 | 36.49 | 1.60 | ||||||||
| Think Tank Commercial Series 2024-3 Trust | 24.75 | 57.37 | 14.20 | 3.04 | 18.42 | 0.56 | ||||||||
| Triton Bond Trust 2023-3P Series 1 | 25.19 | 48.54 | 12.23 | 3.38 | 23.35 | 0.79 | ||||||||
| Blackwattle Series CMBS Trust 2021-1 | 38.11 | 65.08 | 24.80 | 5.56 | 26.99 | 1.50 | ||||||||
| RedZed Trust STC Series 2024-1 | 30.41 | 48.67 | 14.80 | - | - | - | ||||||||
| *At transaction close. WAFF--Weighed average foreclosure frequency. WALS--Weighted average loss severity. CE--Credit enhancement as per S&P Global Ratings' methodology. Source: S&P Global Ratings. | ||||||||||||||
Table 2
| Comparison of default frequency and loss severity adjustments in small-ticket commercial and residential loans | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Typical assumptions* | Commercial§ | Rural§ | Other§ | Residential | ||||||
| Benchmark LTV ratio(%)† | 65† | 50† | 50† | 75 | ||||||
| Loan term | No adjustment | No adjustment | No adjustment | As per GRMBS criteria | ||||||
| Repo MVD at ‘AAA’/’B’ rating(%)‡ | 69.00/41.63‡ | 73.60/44.40‡ | 78.20/47.18‡ | Australia: 55.90/31.49 New Zealand: 57.25/32.00 | ||||||
| LTV--Loan to value. MVD--Market value decline. GRMBS--Global residential mortgage-backed securities. *The typical assumptions are summarized based on our analytical approach applied to the current rated small-ticket CMBS transactions. §From an analytical perspective, we classify the small-ticket commercial properties into three categories: Commercial, covering retail, office, and industrial; rural; and other, including childcare centers, motels, petrol stations. †LTV ratio for small-ticket CMBS transactions is defined as current loan balance/original property valuation. In the absence of a reliable index for small-ticket commercial properties, we do not use the effective LTV ratio that is applied in our global RMBS criteria. ‡Compared with residential properties, we do not use indexation or a concept of over/undervaluation due to data limitations for commercial asset types. We have applied an upward adjustment to the residential repossession market value decline assumption for these commercial asset types. | ||||||||||
For residential properties in small-ticket CMBS transactions, we typically apply the usual assumptions in our global residential mortgage-backed securities criteria.
Why does the analysis link to global RMBS criteria instead of CMBS criteria to rate securitizations of small commercial mortgage loans in Australia and New Zealand?
A key reason is that small-ticket CMBS transactions typically comprise a high loan count and smaller property size, and in underwriting, the assessment of borrower repayment is largely similar to underwriting of self-employed borrowers in residential mortgage loans.
The scope of the CMBS methodology typically applies where cash flow for the securities is derived primarily from commercial real estate assets, and relies on property level analysis to produce an expected case property valuation akin to a 'B' rating category stress level; whereas various sources of income earned by the borrowers are considered for the commercial assets included in the small-ticket transactions. Typically, this methodology would apply to a significantly smaller number, and larger size, of loans than those seen in the Australian small-ticket CMBS transactions.
The following four factors highlight why we link to global RMBS criteria.
Underwriting and servicing The lenders for which we have rated small-ticket CMBS transactions originate small commercial mortgage loans and residential mortgage loans. When the underwriting policies and servicing approaches resemble that of residential loans, we typically consider it appropriate to apply our RMBS criteria as a starting point to analyze the small commercial loans in the pool.
There is limited difference between the underwriting and servicing approach used for the small commercial loans and residential loans across the originators where we have rated a small-ticket CMBS transaction. Whereas there is distinct difference in the underwriting of medium-size to large commercial loans in CMBS transactions. For example, lenders often require engineering and professional reports before loan approval.
Granularity In our global RMBS criteria, an archetypal RMBS pool generally includes at least 250 loans at close. All the current small-ticket CMBS transactions in which we have used the RMBS approach to date have displayed granularity. All the current transactions include pools within the range of about 300-2,000 loans (see chart 1). By contrast, a CMBS transaction normally consists of a much smaller number of materially larger loans.
Chart 1
Loan size/Property value In borrowing RMBS methodology, we have considered that the loan sizes and property values in these pools are broadly similar to a typical RMBS pool. The average loan balance of current rated small-ticket CMBS transactions to date ranges from A$400,000 to A$800,000 (see chart 2). For reference, the average loan size for the 2024 vintage rated RMBS transactions is about A$200,000-A$750,000 for prime and A$450,000-A$750,000 for nonconforming loans. The average property value of current rated small-ticket CMBS transactions is about A$650,000-A$1.3 million and the weighted average current LTV ratio is about 60%-70%. We view this loan size as very small compared with the large loan size we see in a CMBS transaction.
Chart 2
Borrower type In current small-ticket CMBS deals, the borrowers for the small-ticket commercial properties are individuals or small business owners. This cohort resembles the borrowers we see in RMBS transactions. In CMBS transactions, however, we see midsize and large commercial entities.
In summary, we will normally use RMBS criteria as a base if these four factors resemble that of a pool of residential loans. However, our analysis is not limited to these factors. We will analyze each loan pool on a case-by-case basis. For example, we may consider the CMBS approach if there are some large commercial property loans included in the pool because it may present a different credit risk.
Can this approach be used to analyze transactions where most or all the loans are backed by small commercial real estate assets?
Yes. Our approach can be applied to small-ticket CMBS transactions secured completely by small commercial properties or a mix of small commercial properties and residential properties. For example, up to 85% of the Think Tank Commercial Series 2024-3 Trust pool is small commercial property loans (see chart 3).
Chart 3
Will this approach be used to assess similar future transactions?
It depends. We will consider borrowing the RMBS approach to analyze a future small-ticket CMBS deal if it has similar loan features to a rated small-ticket CMBS transaction. However, we will analyze the pools on a case-by-case basis because we believe small-ticket CMBS requires a higher degree of subjective assessment than for a more established asset class such as RMBS.
Several factors necessitate this, including:
- The relatively limited historical statistical data;
- The diversity of commercial loan products and property types; and
- The generally smaller loan pools we have seen so far in the Australia and New Zealand small-ticket CMBS market.
For example, we have not rated a small-ticket CMBS transaction with large commercial loans. If there are large commercial loans in the pool, we may adjust our approach to apply CMBS analysis to these large assets. The largest consolidated commercial loan in our current rated pool is up to A$4.5 million.
How have small-ticket CMBS transactions performed?
We have taken no negative rating actions on any current small-ticket CMBS transactions. We have most recently raised our ratings on the tranches in, Think Tank Commercial Series 2021-2 Trust, Think Tank Commercial Series 2022-3 Trust, Think Tank Commercial Series 2023-2 Trust, and Triton Bond Trust 2023-3P Series 1.
The arrears performance for most of the current rated small-ticket transactions (see charts 4-8) largely aligns with that in the RMBS transactions through a period of ongoing benign economic conditions in Australia. However, we believe that the difference in arrears between residential and small commercial properties will become more pronounced when the economic environment becomes more stressed.
For the Think Tank transactions, the arrears are performing above the Standard & Poor Performance Index (SPIN) for Australian prime RMBS but below the SPIN for Australian nonconforming RMBS. The high level of volatility in arrears for the Blackwattle transaction reflects its highly concentrated pool, where one or two loans in arrears could result in a large percentage of the pool being in arrears.
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
Writer: Lex Hall
Related Criteria
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Asia-Pacific Supplement, April 4, 2024
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
Related Research
- Think Tank Commercial Series 2024-3 Trust Small Ticket CMBS Assigned Ratings, Nov. 27, 2024
- RedZed Trust STC Series 2024-1 Assigned Ratings, May 15, 2024
- Triton Bond Trust 2023-3P Series 1 Prime RMBS And Small-Ticket CMBS Assigned Ratings, Dec. 18, 2023
- New Issue: Think Tank Commercial Series 2023-2 Trust, July 19, 2023
- New Issue: Think Tank Commercial Series 2022-3 Trust, Dec. 4, 2022
- New Issue: Blackwattle Series CMBS Trust 2021-1, Dec. 20, 2021
- New Issue: Think Tank Commercial Series 2021-2 Trust , Dec. 1, 2021
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Charlie Peng, Melbourne + (61) 3-9631-2008; charlie.peng@spglobal.com |
| Secondary Contacts: | Narelle Coneybeare, Sydney + 61 2 9255 9838; narelle.coneybeare@spglobal.com |
| Kate J Thomson, Melbourne + 61 3 9631 2104; kate.thomson@spglobal.com |
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