U.S. commercial mortgage-backed securities (CMBS) loss severities declined and delinquencies grew slightly in the first quarter as collateral performance showed early signs of improvement, according to the CMBS Quarterly Insights reports published by Standard & Poor's (S&P).
S&P separated its CMBS Quarterly Insights publication into two reports: One focuses on first-quarter loss severity trends and the other highlights delinquency activity and rating actions during the quarter. In the first quarter, the average loss severity rate fell below 40% after five consecutive quarters of 50% and higher rates. In addition, the delinquency rate grew by 2.6% – the smallest quarterly increase since December 2007.
Despite an overall drop in the loss severity rate, the retail loss severity rate remains stubbornly high. Retail had the highest loss severity rate, at 45.4% in the first quarter, partly due to bankrupt tenant store liquidations that were liquidated at above-average loss severity rates. In addition to retail, 2007 vintage year transactions, as well as Memphis, Tenn., loan collateral, had the highest loss severity rates in the quarter.
‘We believe that a recovering commercial real estate sector and increased liquidity are providing the underpinnings for better collateral performance and credit metrics,’ says S&P credit analyst Larry Kay. ‘The delinquency rate is trending up at a snail's pace. Although we believe that the slow-growth delinquency trend will continue, we expect to see periodic spikes during the remainder of 2011, especially during periods of heightened maturity activity.’
S&P initiated 723 rating actions, consisting of 687 downgrades and 36 upgrades, during the quarter, as well as 521 affirmations. The downgrades were concentrated in the speculative-grade category.
