Fitch: CREL CDO Delinquencies Could Reach 25% By YE

Delinquencies for U.S. commercial real estate loan collateralized debt obligations (CREL CDOs) closed out 2009 with a two basis-point increase to 12.3%, according to the latest CREL CDO delinquency index results from Fitch Ratings.

Accounting for previously delinquent loans written down or disposed of at a loss, the CREL CDO delinquency rate would have neared 15%, in line with Fitch's expectation for year-end 2009.

‘A continued steady increase in delinquencies is likely for 2010,’ says Karen Trebach, senior director at Fitch. ‘Fitch projects CREL CDO delinquencies to reach 25 percent by the end of the year.’

The removal of 21 delinquent assets last month nearly offset the addition of 26 new delinquent assets, resulting in only a slight increase from the November 2009 total of 12.1%.

New delinquencies were comprised of nine maturity defaults, four term defaults, five impaired commercial mortgage-backed securities (CMBS) and eight repurchased assets. Repurchases consisted of four commercial real estate loans and six CMBS assets. While two assets were repurchased at par, the remaining assets were purchased out of CDOs by asset managers at prices ranging from 88% of par for an A-note interest to 1.4% of par for a credit impaired CMBS interest.

The extension of 14 matured balloon loans helped keep overall delinquencies in line with last month's total, Fitch adds. While one-third of these loans were granted only short-term extensions to allow time for further negotiation, the majority of extensions were multiyear, with several loans receiving principal paydown and/or increased reserve postings among conditions to extension. Overall, there were 51 total extensions reported in December 2009.

Realized losses continue to accumulate with approximately $80 million noted in the December reporting period. To date, total realized losses to CREL CDOs are approximately 4% of the fully ramped collateral balance. The largest loss in December was related to the sale of an real estate owned hotel property that resulted in only a 21% recovery to the CDO.

All 35 Fitch rated CREL CDOS reported delinquencies in December, ranging from 1% to 44%. Additionally, a total of 13 Fitch-rated CREL CDOs were failing at least one overcollateralization (OC) test, which is one transaction fewer than last month as a CDO was able to cure its failure through the extension of several matured balloon loans. 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.

The universe of 35 Fitch-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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