Following a trend developing over recent years, CMBS defaults have risen through 2001, according to the most recent CMBS conduit loan default study by Fitch Ratings.

The rise in CMBS defaults has caused an increase in the cumulative default rate to 1.80% from 1.02% in terms of the number of loans in Fitch-rated CMBS deals. The rating agency also stated that annual defaults more than doubled to 266 in 2001 from 127 in 2000.

However, even if the annual defaults by number of loans double in the next year and remain at the same level for the next five years, investment-grade CMBS classes that are rated at BBB-' or higher are expected to do well considering the loan diversity of most multi-borrower deals.

"Given the subordination levels that investment-grade bonds have, we don't expect them to be affected by the losses caused by the defaulted loans," said Noel Cain, an associate director at Fitch.

The rating agency said that BBB-' or better loans are expected to perform well because, on average, the percentage of bonds that are rated lower than BBB-' represent 9.35%. This is just below the five-year 9.8% cumulative default rate (in terms of dollar balance).

Further, since non-rated and below-investment-grade bonds take the losses associated with defaulted loans before the non-investment classes do, Fitch assumes that investment-grade bonds on diverse multi-borrower CMBS transactions would be unlikely to default or experience losses.

In terms of the number of defaults by property types, the rating agency noted that the highest number of defaults was in the retail sector. When it comes to the cumulative default rates, the hotel sector experienced the largest increase (160%), mainly attributed to the deterioration of this industry through 2001.

For the study, Fitch analyzed roughly 28,000 loans in 195 Fitch-rated deals. The aggregate principal balance of these transactions would be $168 billion.

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