Fitch Ratings recently conducted a study covering CMBS issued from 1990-2003. This included 914 transactions valued at about $484 billion. Of this group, 20 had at least one class defaulted by at least one of the major ratings agencies. In all, said Fitch, there were 41 defaulted classes out of a population of 8,296. The defaulted classes totaled $958 million, or 0.20% of the amount of all the CMBS transactions. Excluding transactions issued in 2002 and 2003, the default rate slightly increases to 0.28% said Fitch.

Of the 20 transactions with defaults, Fitch said that five experienced investment-grade defaults totaling $467 million, and 15 had below investment-grade defaults totaling $491 million. The investment-grade defaults represented 0.17% of the investment-grade universe by number of classes, calculated Fitch, and 0.10% by dollar amount. The below investment-grade defaults were 1.53% by number of classes, and 1.61% on a dollar basis.

By vintage, the highest default rates were recorded for 1991 transactions - 9.09% - followed by 1993 vintages at 2.11% and 1994 at 1.65%. No defaults have been recorded for 2001 through 2003 vintages yet. However, Fitch says it believes 2001 and 2002 vintages, in particular, are vulnerable to future bond defaults since they are overweighted with collateral that was aggressively underwritten at the height of the real estate market in 1999 and 2000.

According to Fitch's analysis, the cumulative overall default rate for CMBS over the 14-year period was 0.20% versus 11% for corporate bonds. The investment-grade cumulative default rate was 0.10% for CMBS and 2.1% for corporates, and 1.61% and 55%, respectively, for below investment-grade bonds. Fitch expects CMBS to perform more like corporate bonds in terms of defaults over time due to the softening of required subordination levels.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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