CMBS: Methodology for Rating Interest-Only Certificates in CMBS Transactions

Introduction

This document describes KBRA’s rating methodology for interest-only (IOs) securities in CMBS transactions. To the extent that a CMBS transaction contains a unique IO structure that does not fall within the parameters described herein, if KBRA assigns ratings to such IOs, its approach will be included in the related transaction report.

By definition, an IO is only entitled to receive distributions of interest; it does not have a principal balance or par value and is not entitled to any distributions of principal. To date, most CMBS IOs issued after the Great Recession include the right to receive a portion of the amount of excess interest resulting from the difference between the net weighted average coupon (WAC) on the underlying pool of mortgage loans and the pass-through rates on some or all of the principal and interest (P&I) certificates issued by the related trust. The portion of such interest that an individual IO receives is a function of the P&I classes that…