Fitch: Continued Maturity Defaults Lead to Rise in U.S. CREL CDO Delinquencies

NEW YORK--(BUSINESS WIRE)--14 new delinquent loans led to the fourth straight monthly increase in the U.S. commercial real estate loan (CREL) CDO delinquency rate to 3.13% for October 2008 from 2.39% for September 2008, according to the latest CREL CDO Delinquency Index (CREL DI) from Fitch Ratings.

“Borrowers continue to be challenged to meet all extension requirements by loan maturity”

Refinancing to third parties remains difficult with nearly 90% of all new delinquencies this month considered matured balloon loans. Overall, 67% of the CREL DI consists of this type of delinquency. While 74% of matured balloon loans continue to make monthly payments, approximately 26% (18% of CREL DI) are considered non-performing with inadequate cash flow to meet debt service obligations. In these cases, sponsors have refused or are unable to infuse additional equity into the projects.

Asset managers continue to report loan extensions. In line with last month's total, asset managers reported 35 new loan extensions in October (3% by number of loans in the CREL CDO universe); at least 75% were extensions that were contemplated in the original loan documents. "Borrowers continue to be challenged to meet all extension requirements by loan maturity," said Senior Director Karen Trebach. "The increase in matured balloons this month reflects that the extension process is taking longer both to negotiate and document." Three loans, representing 25 basis points (bps), fell out of the CREL DI as the extensions were successfully executed prior to this month's reporting cutoff date.

Asset managers continue to repurchase assets out at par to manage the credit quality of their pools. In October, three mezzanine loans (four bps) were repurchased; this rate compares to an average of 14 bps of monthly repurchases over the past year. These affiliated loans from the same CDO were repurchased to allow for a restructuring of the mezzanine debt to accommodate new sponsorship.

Asset managers have also traded some delinquent loans out of CDOs at a loss, including a foreclosed loan and a 90+ days delinquent loan, both of which appeared in last month's CREL DI. The foreclosed loan was traded out at 84.7% of the loan amount, while the 90+ days delinquent loan was traded out at a complete loss. Furthermore, some asset managers have sold some CDO assets to third parties at below par, thereby removing assets that were not yet deemed impaired by the trustee, and realizing losses. To date, however, the impact of the trading losses on the credit enhancement has been negligible; the realized losses have been a small percentage of the transaction's par or, as in the case of the complete loss, the asset manager has contributed assets off its own balance sheet at below market prices in order to support the transaction by rebuilding the par amount.

The CREL DI includes loans that are 60 days or longer delinquent, matured balloon loans, and the current month's repurchased assets. Fitch currently rates 35 CREL CDOs encompassing approximately 1,100 loans and 350 rated securities/assets with a balance of $23.8 billion.

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