Weekly Wrap: Delinquency markers don't capture full SASB hotel-loan risk

February 25, 2021 9:00 PM

At 121-plus days delinquent, a $782.7 million commercial loan securitized in a 2018 single-asset transaction by an Ashford Hospitality Inc. trust would appear to be headed for imminent default.

But DBRS Morningstar says the loan is likely to revert to current status soon, as Ashford nears resuming payments again in the midst of an unusually long 18-month forbearance period for the loan taken out by the Dallas-based REIT.

A successful exit from delinquency status at such a deep stage of delinquency is unusual. But DBRS Morningstar believes that this kind of sudden status change – including loans jumpinginto late-stage delinquency from current status– will be more common given the widespread use of COVID-19-driven forbearances for hotel CMBS loans.

And that makes traditional late-pay indicators a less-reliable risk gauge for CMBS investors to follow, according to a report issued this week by the ratings agency.

“With so many loans granted forbearance, and therefore returning to current payment status, the typical 30-60-90 delinquency progression to foreclosure is being interrupted,” stated the report, written by the agency’s head of research for North American CMBS, Steve Jellinek, and managing director Erin Stafford.

The analysts cited the Ashford Hospitality Trust 2018-ASHF loan as a prime example of the “randomness” of delinquency designations in large-loan hotel property deals.

The loan was placed into special servicing in April 2020 as part of a workout strategy that required the 18-month forbearance in order to renegotiate with mezzanine lenders, the ratings agency report noted. “The loan is not more (or less) of a risk than one that had a quicker path to its forbearance and was, thus, no longer delinquent. In this example, even though only one loan is tagged as delinquent, both loans will reach the point where they need to begin paying back the deferrals.

“This highlights the relative importance of other factors, such as performance and sponsor, when determining loan level risk,” the report stated.

As forbearance periods expire this year, the analysts warned of a “real possibility of loans jumping from current to 90-plus days delinquent.”

Given the “atypical patterns,” Jellinek and Stafford added that “the delinquency rate in and of itself is less of a predictor of risk than it was in the previous downturn.

MARK ELIAS/BLOOMBERG NEWS

Fitch eyes stable floorplan performance in 2021

Although vehicle-production and inventory challenges may curb sales and profits for auto dealers, Fitch Ratings says that dealer floorplan asset-backed securities should have stable ratings performance this year.

In a report issued Monday, the ratings agency stated the stable outlook is “due to solid ABS trust dealer metrics, including strong monthly payment rates (MPR) driven by healthy auto demand and low inventories.”

Dealers are also coming off record profit with an average of $1.79 million per dealer, the highest since 2009, according to figures from the National Automobile Dealers Association.

Dealer floorplan ABS issuance of $3.8 billion last year was lowest annual volume of the post-crisis era, but “2020 turned out to be the most profitable year in history for most networks supporting DFP ABS,” Fitch’s report stated, “in part supported by lender interest curtailment and/or deferral programs along with federal payroll loans. Dealers have cut costs and profit margins remain robust.”

Fitch noted that dealer floorplan ABS platforms have had elevated MPRs in the second half of last year, recovering from large declines in March and April 2020 due to the impact of production shutdowns and sales slumps in the wake of the COVID-19 outbreak in the U.S.

Floorplan trusts reported a historically high 68% average MPR in November. The three-month average MPRs of 62%, and remained elevated at 61% in average monthly payment rates of 68% in November, with some garnering between 90% and 100%. Two issuers (BMW Financial Services and BMW Financial Services’ BMW Floorplan Master Owner Trust DFP) which had MPRs in excess of 100%.

MPRs are considered a key measure to how well a dealer is selling off inventory, since advances from lenders (usually captive-service arms of auto manufacturers) in order to finance new-vehicle acquisitions are repaid by dealers after the vehicle is sold to a retail customer.

Dealers’ main challenge to start the year is supply: inventories were low with just 2.8 million units as of Feb. 2, compared to 3.3 million a year ago, Fitch’s report stated. Fitch projects 2021 sales of 15.6 million new vehicles.

Glen Fest

Wall Street is inflation-proofing its debt-market portfolios

From money managers at BlackRock and T. Rowe Price, to analysts at Goldman Sachs, to the credit shops run by Blackstone and KKR, a new economic reality is prompting Wall Street’s most powerful forces to adjust their investment strategies.

The rise in inflation set to accompany the post-pandemic economic boom is threatening to reverse the four-decade decline in U.S. interest rates, sparking a rush to protect the value of trillions of dollars of debt-market investments.

The first signs of this shift have already emerged: These firms and others are moving money into loans and notes that offer floating interest rates. Unlike the fixed payments on most conventional bonds, those on floating-rate debt go up as benchmark rates do, helping preserve their value.

“We’ve had a long 35 to 40 years of rate decline that has been a big support behind fixed-income investing, a big support behind equity multiples expanding, and so for those of us that live and breathe investing, it’s been a wind at our back for a long time,” said Dwight Scott, global head of credit at Blackstone, which manages $145 billion of corporate debt. “I don’t think we have the wind at our back anymore, but we don’t have the wind in our face yet. This is what the conversation on inflation is really about.”

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Bloomberg

Auto-loan extensions spiked in December

Extension rates skyrocketed in December for auto loans held in asset-backed securities, a combination of seasonal trends as well as the lingering economic impact of the COVID-19 pandemic.

S&P Global Ratings said that extensions for public prime ABS pools, extensions increased to 0.73% in November compared to 0.55% in November (a 32.5% increase), while subprime borrowers’ extension rates shot to 4.84% from 4.04% from the previous month, a jump of 19.2%.

Extension rates have traditionally climbed in December as borrowers seek temporary help on credit obligations at year’s end, but the sharp rise in granting extensions in 2020 was also a result of many consumers remaining out of work or having hours trimmed due to business restrictions and closures meant to counter the spread of the coronavirus, according to S&P’s report.

Another factor was the expected arrival of $600 U.S. government stimulus payments (plus $600 per child) in January to consumers, the ratings agency noted in a monthly auto ABS performance report.

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Glen Fest

Share of zombie foreclosures fall in the first quarter

While the overall foreclosure rate fell in the first quarter of 2021, the majority of states saw rising shares of zombie properties, according to Attom Data Solutions.

A total of 175,414 homes went into the foreclosure process in the opening quarter of 2021 and 6,677 of them, a 3.8% share, sit vacant, according to Attom Data Solutions’ Vacant Property and Zombie Foreclosure Report. That fell from 200,065 and 7,612 units quarter-over-quarter and 282,800 and 8,678 units year-over-year.

Overall, zombie foreclosures — empty homes that are in the foreclosure process — represent one in every 14,825 U.S. residential properties, a widening ratio from 13,074 quarterly and 11,405 annually.

However, the rates of zombie foreclosures jumped from the fourth quarter in 29 states. Kansas had the most growth, increasing 4.4 percentage points to 20.7% from 16.3%. Arkansas came next, going to 6.6% from 3.1%, then Minnesota rising to 7.1% from 4.7%.

The dwindling zombie foreclosure numbers stand in contrast with the Great Recession when abandoned properties dotted many communities, according to Todd Teta, chief product officer with Attom Data Solutions. While zombie foreclosures dwindle and don’t currently pose an issue, it could turn into one depending on the economy when CARES Act protections end.

“The trend does remain on thin ice because foreclosures are temporarily on hold, and the market is still at risk of another wave of zombie properties when the moratorium is lifted,” Teta said in the report.

Oklahoma, Tennessee, Mississippi and Kansas all tied with the highest first quarter vacancy rate at 2.5%. At the metro level with populations of at least 100,000, Peoria, Ill., had the highest rate at 15.5%, followed by South Bend, Ind., at 15.2% and Cleveland at 12.3%.

New York retained its lead in zombie properties, totaling 2,064 in 1Q. Florida trailed with 926, then 759 in Illinois. Indiana leads by zombie share of investor-owned homes at 7.5%, followed by 6.5% in Kansas and 5.9% in Mississippi.

Turning over the vacated housing stock could be one way to help ease the nation’s squeezed inventory.

“If there’s an abandoned property, we need to get it back in the marketplace both for the good of the neighborhood and the supply shortages,” Ed DeMarco, president of the Housing Policy Council, said in an interview. “We shouldn't be artificially keeping supply off the market, if going through with the foreclosure doesn't create a conflict with any COVID issues.”

Of the nearly 99 million homes in the U.S., 1.45 million sit vacant, totaling a 1.5%, share of single-family homes and condos.

Paul Centopani