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Hotel, retail loans fuel surge in CMBS delinquencies

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Coronavirus-related disruptions at retail and hotel properties are fueling a surge in conduit CMBS delinquencies, according to Moody's Investors Service.

The ratings agency said in a Nov. 19 report on the U.S. CMBS market that the increase stemmed from newly delinquent large retail and regional mall loans.

"With continued cash flow issues from the ongoing health crisis, we expect the distress to continue in the coming months," Moody's said.

As new coronavirus infection rates reach all-time highs, prospects for a second round of federal aid to ailing businesses remains uncertain.

Moody's said that its CMBS conduit loan Delinquency Tracker increased to 7.77% in October from 7.51% the previous month, reaching the second highest rate since November 2013. The October rate, however, remains below the post-crisis peak of 7.95% in July, and well below the previous peak of 10.06% in July 2012. The 26 basis points jump represents the third largest monthly increase since May 2017, Moody's said.

The ratings agency's Specially Serviced Loan Tracker increased to 9.81% in October from 9.68% the month before. Specially serviced loans are typically those in which payments are 60 days or more past due and are seen as being at risk for default. The outstanding balance of those loans, according to Moody's, increased to $37.77 billion in October from $37.17 billion in September, with hotel and retail loans accounting for 76.21% of the aggregated total.

"Six of the 10 performing loans newly transferred to special servicing are secured by retail, two are secured by hotel and the other two are secured by office and multifamily each," the Moody's report says.

It adds that retail properties made up 44.9% of delinquent loans that were 60 days or more past due, and hotel properties made up 35.1%.

Hotel and retail property loans also drove increases in forbearance and loan modifications stemming from COVID-19-related business disruptions. Moody's said that 3.6% of CMBS conduit loans received COVID-related modifications, of which loans secured by hotel and retail properties made up 90%. Large Loan/Single Asset Single Borrower loans made up 7.8% of all COVID-related modifications, of which hotel and retail properties made up 98%, according to Moody's.

"Within the conduit universe, 17.3% of all hotel loans and 3.6% of all retail loans have received recent loan modifications," the report said. "Within the LLSASB universe, 24% of all hotel loans and 13.2% of all retail loans have received recent loan modifications."

On a more positive note, Moody's said, the share of loans less than 60 days delinquent has been largely flat, "potentially signaling that the most stressed assets as a result of the initial coronavirus-related interruptions have been completely realized."

The ratings agency cautioned, however, that the signal is "highly contingent" on factors such as debt relief agreements, government support, and a successful resolution to the health crisis that enables regional economies to open safely.

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