Fitch Ratings believes it is likely that iStar Financial — a large player in structured financing for commercial real estate — will go into default on its obligations given its weakened financial position.

According to Fitch, "The quality of iStar's loan portfolio continues to deteriorate." It noted that in the second quarter alone the New York-based iStar recognized $435 million of loan loss provisions.

Over the past 12 months it has taken $1.3 billion in loan loss provisions. As of June 30, non-performing and watch list loans represented more than 50% of iStar's loan portfolio, compared to 43% at the end of March.

Given the reduced capital availability in the commercial real estate debt capital markets, Fitch expects a further increase in both provisions for loan losses and non-accrual loans for the remainder of 2009.

Capital access challenges and weakening property-level fundamentals have decreased the ability of iStar's borrowers to repay loans, as many borrowers historically have refinanced their loans via the secured debt markets or have sold assets.

The rating agency believes iStar will have a liquidity shortfall sometime between now and 2011, where if iStar receives only 30% of payments due to it the company would have a shortfall of $3 billion to pay its own borrowings.

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