rDue to eroding property market fundamentals, delinquencies and negative rating actions in Standard & Poor's rated CMBS deals increased in the first quarter, according to a report released today.

Factors such as continuing job losses, travel curtailment, and economic uncertainty post Iraq influenced property performance and contributed to higher delinquency levels, said S&P. Though not all property sectors and markets are feeling the stress equally, the overall dip is broad based.

In the first quarter of this year, the delinquency rate for S&P-rated CMBS transactions was 1.56%, which increased by 5 basis points from last quarter. Though this may not seem like a large increase, the actual dollar increase was dramatic. The $2.87 billion delinquent as of March 31, 2003 is actually a 15% increase in the amount of outstanding delinquent loans over last quarter. This is after a fairly stable delinquent balance ranging from $2.3 to $2.5 billion in 2002.

Analysts said that property market weakness has led to some unprecedented downgrade rating activity in the first quarter. With 21 upgrades and 49 downgrades in the U.S. and Canadian CMBS markets, the first quarter showed the lowest upgrade-to-downgrade ratio in recent times. Aside from this, there were also large differences in the composition of downgrades versus those initiated in 2002. In contrast to last year, a considerable number of 1Q downgrades were the direct effect of real estate performance. Also, many of the rating actions were taken on investment-grade bonds.

Of the quarter's 49 downgrades, only three of them were caused by dependent rating actions, such as single credit-tenant leases (CTLs). This is very low compared to fourth quarter downgrades (41) and full year 2002 downgrades (178). Nearly 60% of these were due to dependent rating actions. Most of the lowered ratings in the quarter were because of performance declines in the lodging and office sectors. Additionally, of the 49 bonds downgraded in 1Q, 25 involved investment-grade classes. S&P said that with real estate markets weakening, the stress is being felt on larger, high-profile properties.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.