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Fitch: Commercial Real Estate Loan CDO Delinquencies Rise

Delinquencies on commercial real estate loan-related collateralized debt obligations (CDO) have risen to 2.39% for September, up from 1.79% in August, according to Fitch Ratings. The increase in delinquencies on commercial real estate loan CDOs for the third month in a row comes about as a result of nine new delinquent loans, according to the New York-based credit rating agency.

“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,” according to Karen Trebach, a Fitch senior director.

Delinquency rates on these CDOs range from 0% to 14%. The rating agency recently downgraded the below-investment grade classes of one commercial real estate loan CDO. In the past three months, Fitch has also placed classes from two others on rating watch negative. Fitch anticipates that more commercial real estate loan CDOs will be placed on rating watch negative or downgraded as further problem loans come to the surface.

Commercial real estate loans found in these CDOs are generally highly leveraged and backed by transitional properties. In today’s economy, these properties have run into difficulties. As a result, sponsors have found it difficult to refinance and to fund current loan obligations.

This negative outlook for commercial real estate loan 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.

A continuing trend has been the increase in the number of matured balloon loans, which comprise approximately 58% of all new delinquencies this month. While the majority of these loans continue to make monthly payments, approximately 30% are considered non-performing and not generating adequate 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 the total for August, asset managers reported 33 new loan extensions in September, or 3% of the total number of commercial real estate loan CDOs.

Fitch’s CREL delinquency index includes loans that are 60 days or longer delinquent, matured balloon loans, and the current month's repurchased assets.

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