Fitch: U.S. CREL CDO Delinquencies Up Again in September

2008-10-13 19:28:03 -

- Nine new delinquent loans led to the third straight monthly increase in the U.S. commercial real estate loan (CREL) CDO delinquency rate to 2.39% for September 2008, according to the latest CREL CDO Delinquency Index (CREL DI) from Fitch Ratings.

'Although this delinquency rate remains relatively low and many CREL CDOs are adequately cushioned to absorb some credit

deterioration, some CDOs are experiencing more distress than others,' said Senior Director Karen Trebach. CREL CDO delinquency rates range from 0% to 14%. Fitch recently downgraded the below investment grade classes of one CREL CDO, and within the past three months, Fitch has also placed classes from two other CREL CDOs on Rating Watch Negative. Fitch anticipates that more CREL CDOs will be placed on Rating Watch Negative or downgraded as further problem loans come to the surface.

Commercial real estate loans found in CREL CDOs are generally highly leveraged and backed by transitional properties. In the current state of the economy, these properties often have stalled or failed business plans. As a result, sponsors have found it difficult to refinance and/or fund current loan obligations. This negative outlook for CREL CDOs is somewhat mitigated by the asset managers' flexibility to change the terms of the underlying assets through continued extensions and modifications. In addition, some asset managers continue to exercise their right to repurchase credit impaired loans.

The CREL DI is up from last month's rate of 1.79%. A continuing and anticipated trend has been the increase in the number of matured balloon loans which comprise approximately 58% of all new delinquencies this month, and nearly 55% of the CREL DI. Of note, though, after the cutoff date of the report, one asset manager reported that two of the 14 matured balloon loans included in the CREL DI, accounting for 18 basis points (bps), were extended. While the majority of these loans continue to make monthly payments, approximately 30% are considered non-performing with inadequate cash flow to meet debt obligations. In these cases, sponsors have refused or are unable to infuse additional equity into the projects.

Asset managers report the continued use of loan extensions by borrowers and lenders, as refinancing to third parties remains difficult under current market conditions. In line with last month's total, asset managers reported 33 new loan extensions in September (3% by number of loans in the CREL CDO universe); roughly 90% were extensions that were contemplated in the original loan documents. Notably, some borrowers have been challenged to meet all extension requirements by loan maturity. For example, one asset manager reported a delay between loan maturity and extension execution resulting from difficulty in arranging an interest rate cap given the volatility in the LIBOR rate, as of late. Interest rate caps are often a lender requirement for exercising extension options.

Two loans were repurchased this month (20 bps). The first loan is an A-note secured by a multifamily property. The loan, which was approaching a maturity default, was repurchased so that the affiliated junior lender could more nimbly pursue its rights. The other repurchased loan is a whole loan secured by land intended for luxury home sites outside Boston, Massachusetts. The lender and borrower were in the process of extending this loan as the borrower needed more time to obtain site plan approval and secure takeout financing.

The CREL DI includes loans that are 60 days or longer delinquent, matured balloon loans, and the current month's repurchased assets.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Karen Trebach, 212-908-0215
Stacey McGovern, 212-908-0722
Sandro Scenga, 212-908-0278 (Media Relations)