Fitch: CDO Delinquencies Increase in June

MBA (7/16/2008 ) Palaparty, Vijay
U.S. commercial real estate loan CDO delinquencies increased in June to 1.58 percent from 1.08 percent, according to the most recent CREL CDO Delinquency Index from Fitch Ratings, New York.
Karen Trebach, senior director at Fitch Ratings, said the maturity default of one participated loan secured by a hotel/condominium development in South Florida contributed to the higher index, contributing 38 basis points to the 50 basis point increase. The CREL DI is approximately four times the Fitch CMBS Delinquency Index of 0.39 percent, she said.

“Although the CREL DI continues to be higher than the CMBS DI, it is not unexpected," Trebach said. "First, assets securing the loans in a CREL CDO are either transitional in nature or highly leveraged. In addition, the CREL DI covers 35 transactions with 340 assets while the CMBS DI covers more than 500 transactions with significantly more than 42,000 loans.”

The smaller number of loans in the index can have a larger impact on the delinquency percentage as a result, Trebach said.

Of the 20 loans in the CREL DI, more than one-third were land loans, which are hard to refinance in the current capital constrained market, Trebach said. “Fitch-rated CREL CDOs are rated with the expectation of higher default probabilities for land loans,” she said.

Fith also models hotel loans, which made up the next highest property type in the index at 26 percent, with higher default probability. Two loans secured by retail properties made up the third largest component by property type at 20 percent. Fitch anticipates delinquencies in this category to increase because of the stressed U.S. economy. Retail property loans represent nearly 6 percent of all CREL CDO loans.

Repurchases made up a smaller percentage of the overall index compared to six months ago. However, asset managers continue to repurchase assets from their CDOs, Trebach said. In the index reporting period, asset managers repurchased three assets including two from one CDO. The third repurchased loan was a B-note secured by land intended for home sites.

“Repurchases of troubled loans are expected to be limited to few issuers with liquidity remaining within their balance sheets,” Trebach said. “Repurchases of credit impaired assets are an important component of the index as their exclusion would overstate the performance of CDOs.”

Though not included in the index, 11 loans representing 1.12 percent of the CREL CDO collateral were 30 days or less delinquent in June—up from last month’s total of 1.08 percent. “A leading indicator for the delinquency index, the loans in the 30-day bucket have steadily increased since October 2007,” Trebach said.

Five rated assets were considered credit impaired but not delinquent, therefore not included in the index. Fitch said the decrease from last month’s 12 credit impaired assets resulted from the disposition of seven U.S. subprime residential mortgage-backed security bonds from one CDO. These securities were sold by the CDO at a steep discount resulting in realized losses for the CDO, Trebach said.

Fitch also reported 20 loan extensions in June, up from last month’s total of 14. Nearly half of the extensions resulted from options contemplated at closing. The other half was modifications from original loan documents.

“These loan extensions continue to reflect the lower available liquidity for CRE loans, especially those typically found in CREL CDOs, which tend to be backed by transitional and/or highly leveraged CRE collateral,” Trebach said