Fitch Ratings has observed a larger number of asset managers removing credit impaired assets at prices below par, resulting in realized loss to CDO collateral.

Par building has offset many CDO collateral losses, primarily through the purchase of rated securities priced well below par.

Fitch reported that the May delinquency index was relatively stable at 7.9%, as a result of the removal of credit impaired assets and despite eight new delinquent loans entering the commercial real estate loan (CREL) CDO delinquency index. This number is a slight increase from last April’s 7.8%.

Currently, 11 of the 35 CREL CDOs rated by Fitch are failing at least one overcollateralization test.

Fitch said it considers all losses to par in its evaluation of the credit enhancement available for each CDO tranche. Realized losses to the collateral have been occurring in three different ways: trades of impaired assets, repurchases, and discounted payoffs.

Overall, the CREL delinquency index consists of 32% term defaults, 44.5% maturity defaults, 22.7% foreclosure/real estate owned (REO), and 0.8% repurchased loans. Fitch expects more delinquent loans to move towards foreclosure and REO. Additionally, further realized collateral losses are expected as CDOs begin to resolve these foreclosed and REO loans.

Loans backed by interests in land continue to represent the highest percentage of assets in the CREL delinquency index at approximately 30.1%, up slightly from last month’s 27.7%. Multifamily is the next highest percentage at 21.1%.

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