U.S. CREL CDO Delinquencies Exceed 10%

New matured balloons and past-due loans secured by interests in nontraditional assets propelled U.S. commercial real estate loan collateralized debt obligation (CREL CDO) delinquencies past 10% for the first time, according to the latest index results from Fitch Ratings.

The Fitch CREL CDO Delinquency Index for October increased to 10.8% from 8.7% in September, with nontraditional property types now representing 44% of all delinquencies – a disproportionate amount compared to the percent of all collateral in CREL CDOs, the agency says. Nontraditional property types, which include loans secured by interests in land, condominium conversions and construction projects, comprise only 13% of the collateral in Fitch-rated CREL CDOs.

"About a third of the new delinquencies are large matured balloon loans that may be ultimately extended," says Senior Director Karen Trebach. "While these loans may be returned to performing status sometime in the future, Fitch will consider the merits of loan modifications and extensions in its surveillance analysis."

The largest new delinquency is a $110 million A-note secured by a portfolio of eight multifamily properties located in five states. An affiliate of the asset manager assumed the loan and subsequently extended it for a year at a below-market rate, which was 200 basis points lower than the coupon at origination. Without this spread reduction, the cashflow would not have been sufficient to cover debt service. Upon its newly extended maturity date, this loan defaulted.

New delinquencies secured by nontraditional property types this past month included two loans secured by interests in land and two secured by construction projects. Land loans currently make up the largest component of the index, with 32% of all delinquent loans. Approximately 40% of all land loans in the Fitch-rated CREL CDO universe are now delinquent, with increased delinquencies expected.

Other nontraditional asset types also have high overall delinquency rates, with condominium conversions at 23% and construction loans at 29%. Fitch assumes all loans secured by interests in land and other non-income producing assets experience a term default as part of its rating reviews.

SOURCE: Fitch Ratings


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