CREL CDO Delinquencies Increase Slightly; Realized Losses Grow

While asset manager disposal of troubled assets helped keep U.S. commercial real estate loan collateralized debt obligation (CREL CDO) delinquencies under 13%, realized losses continue to grow, according to the latest CREL CDO delinquency index results from Fitch Ratings. Total delinquencies increased slightly in March to 12.8% – up from 12.5% in February.

Though 19 assets were added to total delinquencies in March, 17 assets were removed, including nine (56 basis points) that were disposed of at a loss. The trend of rising realized losses warrants close attention, says Stacey McGovern, a director with Fitch Ratings.

"Realized losses increased almost three-fold this past month and will continue to do so at an accelerated rate," she says.

In total, $121.2 million in realized losses were reported in March. To date, total realized losses to CREL CDOs encompass approximately 4.7% of the total outstanding collateral balance.

The largest single loss in March was related to a B-note secured by a home site development located in Arizona. A severe decline in the property's value resulted in the subordinate interest being foreclosed out at a total loss, Fitch says. Six other defaulted assets, including five junior-loan interests and one commercial mortgage-backed security interest, had recoveries of less than 2.5%. Average recoveries on disposed assets were approximately 32%.

For the month of March, 40 loan extensions were reported, including five former matured balloon loans. Some of the extensions were short-term (i.e., one to three months) to allow time for further negotiation. Many longer-term extensions included loan modifications such as partial paydowns, cross collateralization, and/or the posting of reserves.

Of the 35 CREL CDOs rated by Fitch, 34 reported delinquencies in March, ranging from 1.4% to 41.1%. Additionally, 15 of those CREL CDOs were failing at least one overcollateralization (OC) test, which is similar to the prior month's total. Failure of OC tests leads to the cutoff of interest payments to subordinate classes, including preferred shares, which are typically held by the CDO asset managers, Fitch explains.

The Fitch Ratings universe of 35 rated CREL CDOs currently encompasses approximately 1,100 loans and 350 rated securities/assets with a balance of $23.8 billion. The CREL delinquency index includes loans and assets that are 60 days or longer delinquent, matured balloon loans and the current month's repurchased assets.

SOURCE: Fitch Ratings


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