CRE CDOs Could Experience More Downgrades, Fitch Says

The pace of CRE CDO upgrades will be considerably slower in 2008, according to a report issued today from Derivative Fitch. While the CRE CDO upgrade to downgrade ratio was 30 to 1 through the first three quarters of 2007, higher loan losses due to a prolonged liquidity crisis and sustained value declines, could result in downgrades to investment grade classes of CRE CDOs backed by subordinate CMBS bonds, Fitch said. The rating agency also expected fewer upgrades on the CUSIP CDOs and ReREMICs in 2008 as a result of the anticipated slowing of improved performance on the underlying CMBS collateral. Additionally, newer vintage CMBS transactions have a concentration of full or partial interest-only loans that will slow the amortization of the most senior CMBS classes. In fact, Fitch expected 2007 vintage CMBS loans to have higher defaults than other vintages. However, on more recently originated loans, Fitch said it was beginning to see evidence of more conservative underwriting and loan structural features. In the first-half 2007, CRE CDO and ReREMIC issuance volume was strong, slowed in August from liquidity issues in the broader capital markets, Fitch said. Year-to-date as of September 2007, 26 transactions have been issued with more than $19 billion of collateral compared with 25 transactions with $18 billion over the same period in 2006, the rating agency said. Of 115 Fitch-rated CRE CDOs, 13 have exposure to U.S. subprime RMBS, or less than 11% of the Fitch-rated CRE CDO universe. All 13 of the transactions were issued between 2000 and 2006 and generally have sufficient cushion to sustain their current ratings, Fitch said.