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Commercial Real Estate CDO Delinquencies Still Rising

An inability to refinance maturing loans fueled the fourth straight monthly rise in the delinquency rate for collateralized debt obligations composed of U.S. commercial real estate loans (CREL CDOs), according to the latest CREL CDO Delinquency Index from Fitch Ratings. Fitch deems a loan delinquent when payments are 60 days overdue.

The U.S. commercial real estate CDO delinquency rate climbed to 3.13% in October from 2.39% in September, the rating agency found. Of the 14 newly delinquent loans, 90% were matured debts with balloon payments due. In fact, two thirds (67%) of all delinquent loans tracked by Fitch’s index fall under the same category of falling delinquent when the balloon payment was due.

While 74% of matured balloon loans continue to make monthly payments, approximately 26% — and 18% in Fitch’s CREL CDO Delinquency Index — are considered non-performing with inadequate cash flow to meet debt service obligations. In these cases, sponsors have refused or are unable to infuse additional equity into the projects.

Some borrowers with maturing loans are seeking and obtaining extensions to their existing debt agreements rather than refinancing while the credit crisis lingers. Asset managers reported 35 new loan extensions in October or 3% by number of loans in the CREL CDO universe, in line with September’s loan extensions.

At least 75% of October’s loan extensions involved borrowers who were exercising extension options spelled out in the original loan documents. Those options usually entail strict conditions for credit enhancements or other measures to reduce the lender’s risk, however, and meeting those conditions before the loan matures is a challenge for borrowers. That’s why the number of balloon loans in delinquency is increasing, according to Karen Trebach, senior director at Fitch Ratings. “The increase in matured balloons this month reflects that the extension process is taking longer both to negotiate and document.”

Some borrowers have successfully extended their loans despite a brief lapse into delinquency when negotiations exceeded the original loan's maturity date. Three loans, representing 25 basis points in Fitch’s index, were successfully extended and removed from the list of delinquent loans in the latest index report.

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