In a report, Fitch Ratings said that 21 newly delinquent assets led to a rise in U.S. commercial real estate loan (CREL) CDO delinquencies.
The rise was up to 6.5% for March 2009, up from 5.4% in February 2009, according to the
latest CREL CDO delinquency index (CREL DI) from the rating agency. Fitch now rates 35 CREL CDOs covering around 1,100 loans and 370 rated securities/assets with a balance of $23.8 billion.
The 28 CREL CDOs contained at least one delinquent loan with individual delinquency rates ranging from less than 1% to 22.1% of the CDO par balance, as of the March 2009 reporting period. Fitch is still monitoring CDO delinquencies on a monthly basis. Since September 2008, the agency has taken negative actions on 20 of its 35 Fitch-rated CREL
deals with more downgrades and Negative Rating Watches expected with the review of the transactions are reviewed.
By contrast to the recent trend of limited repurchases, six assets (27 basis points of the CREL DI) were repurchased from three different CDOs in the March reporting period. An asset manager repurchased two assets from its CDO at par, while the four other assets from two different CDOs were repurchased at a 46.3% average discount to par, including one defaulted security that was repurchased at 0.001% of par. Many CDOs allow for repurchases at prices that are less than par based on market pricing or third party opinion of value.
The repurchases were probably a result of an effort to maintain cushion in par value tests, therefore avoiding the diversion of cash flow from the CDO's preference shares. Although only one repurchased asset was haircut in the previous month for the purpose of its CDOs par value calculation, the remaining assets were expected to be haircut imminently because of their
impaired statuses. For the most part, new higher-rated assets were traded into the CDO at a discount within a few days of the repurchases to re-build the total CDO par. Fitch considers asset purchase prices in its evaluation of CDO collateral.
"Further maturity defaults are likely as the illiquid credit markets provide limited prospects for the payoff of loans," said Fitch Senior Director Karen Trebach. Excluding the repurchased assets, nearly all of the new additions to the CREL DI consist of matured balloon loans. Furthermore, reported loan extensions decreased to 21 for the month, down from 37 in February, and more in line with the prior two months totals.
Non-cash flowing property types make up the highest percentage of assets in the CREL DI. Loans backed by interests in land are currently the highest percentage of assets in the CREL DI at around 32%.
Condominium conversions as well as construction loans make up an added 11.1%. "Under the current credit market conditions, Fitch anticipates increased defaults on land loans as debt service reserves burn off and business plans fail to actualize," Trebach said.
The CREL DI covers loans that are 60 days or longer delinquent, matured balloon loans, as well as the current month's repurchased assets.
