Fitch downgrades BMO CMBS classes as troubled multifamily loans raise loss risk

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Fitch downgrades BMO CMBS

Highlights

Fitch downgraded 11 classes of BMO 2023-C5 and five classes of BMO 2024-5C5, citing deteriorating multifamily loans and revised multiple Outlooks to Negative.
Significant valuation declines in the Cincinnati Multifamily Portfolio (6.1% of pool) and Chicago Steiner Portfolios (1.0% and 0.6%) drive elevated loss risk.
Fitch's 'Bsf' rating case assumes a 25.0% loss rate, 8.75% cap rate, and warns of further downgrades amid negative property value trends and growing special servicing transfers.

Downgrades tied to specially serviced multifamily exposure

As reported by Fitch Ratings, the downgrades reflect higher loss expectations driven mainly by deteriorating multifamily loans in both transactions that have moved to special servicing. In BMO 2023-C5, Fitch points to the Cincinnati Multifamily Portfolio, which represents 6.1% of the pool, along with the Steiner Portfolio - Chicago 4-Pack at 1.0% and the Steiner Portfolio - Chicago 3-Pack at 0.6%, as loans that show significant performance declines and sharp reductions in appraised values since issuance.

For BMO 2023-C5, Fitch has downgraded 11 classes and revised the Outlook on class A-S to Negative from Stable. The Outlooks on classes B, C, D, E, F-RR, X-B, X-D, X-E, and X-FRR remain Negative.

Fitch has also downgraded five classes of BMO 2024-5C5. The Rating Outlooks for classes A-S, B, C, X-B, and X-D are revised to Negative from Stable, while class D is assigned a Negative Outlook after the downgrade; the Outlooks for classes E-RR and F-RR remain Negative.

Valuation declines deepen risk for Chicago loans

Fitch says the Negative Outlooks indicate potential for further downgrades if property values fall further or if additional loans transfer to special servicing. Its 'Bsf' rating case loss of 25.0%, excluding concentration add-ons, is based on Fitch issuance net cash flow, an 8.75% cap rate, and an elevated probability of default tied to delinquent loan status and weakening operating performance.

The agency also highlights additional exposure to the same sponsor through two other specially serviced loans, Steiner Portfolio - Chicago 4-Pack at 1.0% and Steiner Portfolio - Chicago 3-Pack at 0.7%. Both loans are secured by multifamily properties in Chicago, Illinois, adding to pressure on the transactions as Bank of Montreal-originated collateral shows continued strain in the U.S. multifamily segment.

Our earlier coverage of Fitch’s BBB- rating on Hainan Rubber’s proposed subordinated perpetual securities explained how the notes’ junior ranking in the capital structure and the issuer’s option to defer coupons drive the rating outcome. We also outlined Fitch’s view of the group’s high leverage and liquidity position, and how expected state support underpins funding access despite elevated debt metrics.

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