NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) released a research report: Oil Price Increases Won’t Plug CMBS Losses.
It has been more than a year since KBRA reviewed the impact of falling oil prices on energy-related CMBS loans. At the time of our report entitled Estimated Losses Spill Over to Oil Exposed Loans, prices were hovering around $30 per barrel. Prices have increased since then to approximately $50 per barrel.
Despite the increase in prices, employment in the sector has not fully recovered. With fewer jobs, which are a key demand driver for commercial real estate, property fundamentals have continued to weaken. In many cases, property cash flows have been unable to support required debt-service payments and collateral values have fallen below origination proceeds.
In the prior report, we designated 38 loans ($684 million in principal balance) in CMBS 2.0 as oil-exposed KBRA Loans of Concern (K-LOCs). K-LOCs are loans that are in default or at a heightened risk of default. The number and current principal balance of oil-exposed K-LOCs has climbed markedly since then, and currently include 83 loans ($1.1 billion) spread across 65 transactions.
Our loss estimates for the oil-related K-LOCs have also meaningfully risen since the last report, to $307.2 million from $162.3 million with an average loss severity of 77.1%. Previously, we identified two states, North Dakota and Texas, with oil related K-LOCs. Oil related K-LOCs have now been identified in other energy-related markets, including Louisiana, Montana, New Mexico, Oklahoma, Pennsylvania, Utah, Washington, and West Virginia.
Of the 83 K-LOCs, 35 are in special servicing and 28 have been assigned appraisal reduction amounts (ARAs) totaling $148 million. The loss implied by the ARA based upon the total loan exposure ranges from 22.5% to 70.8% with an average of 52.5%. Of the 65 transactions with oil related K-LOCs, 59 of these currently have certificates with interest shortfalls totaling slightly over $10 million. Of these transactions, to date, KBRA has taken negative rating actions on 10 classes from five transactions, of which two classes have been downgraded twice.
Optimism is starting to flow back into oil-intensive regions. Oil companies have developed new technologies and initiated operating efficiencies enabling them to make profits at current price levels. However, it is likely that the recovery is too little, too late for more than one-third of the oil related K-LOCs that are more than 90 days delinquent, in foreclosure, or real estate owned.
To view the report, please click here.
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KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).