This methodology applies to debt instruments secured by commercial real estate (CRE). This includes direct exposures to CRE loans or securitisations of CRE loans i.e. commercial mortgage-backed securities (CMBSs), collateralised loan obligations (CRE CLOs), asset-backed securities (CRE loan ABSs), CRE debt funds or similar CRE debt structures.

Scope’s methodology offers a unique cash flow framework to analyse the credit risk of CRE secured debt. It focuses on an asset-specific cash flow analysis to assess a CRE security’s probability of default, its estimated recovery and the extent of any resulting expected loss.

Scope expects positive and negative rating changes of up to two notches following the publication of the methodology.

As per its policies, Scope will place under review the transactions impacted by the new methodology as soon as practically possible. The reviews and changes to the affected ratings will be completed within six months.

The final methodology can be downloaded here or on www.scoperatings.com.

The CRE loan and CMBS Rating Methodology complements the General Structured Finance Rating Methodology and should be read in conjunction with the Counterparty Risk Methodology.

Summary of the key changes

1. An alignment of the relationship between probability of default and expected loss with that in our General Structured Finance Rating Methodology.
2. Amendments to our all-in refinancing rate framework
3. The introduction of a scoring framework for determining assumptions and the rateability of construction and refurbishment CRE transactions
4. A clarification of how we incorporate inflation into the rating analysis
5. A clarification of how we incorporate interest rate risk into the rating analysis
6. An update of our liquidity coverage expectations
7. Updates of our illustrative rental value haircuts, property and vacancy costs and capitalisation rates
8. An amendment of our foreclosure assumptions
9. An update of our sensitivity analysis
10. The deletion of the appendix regarding the CRE loan and CMBS data template
11. An amendment of our CRE loan and CMBS data guidelines
12. The introduction of a glossary as well as editorial changes to enhance clarity
13. Editorial changes

Scope evaluated the relevance, significance and applicability of comments submitted by market participants during the request-for-comments period, which ended on 19 October 2023. No additional changes were introduced as a result. The Feedback report can be downloaded here or on www.scoperatings.com.