KBRA Releases Research – CRE CLO: Early COVID Test Results Are In

NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases research on commercial real estate (CRE) collateralized loan obligation (CLO) performance during the pandemic. CRE CLOs came of age after the global financial crisis and is facing its first economic downturn as a result of the COVID-induced recession. While the long-term effects of the pandemic are still unknown, CRE CLOs are faring well so far, based on early test results. In this report, we discuss the following main observations:

• The delinquency rate across 33 KBRA-rated CRE CLOs totaling $17.7 billion remain low, at 3.3%. The KBRA-rated conduit, single borrower (SB), and large loan (LL) commercial mortgage-backed security (CMBS) delinquency rate is 2.2x higher, at 7.3%.
• Initial CRE CLO sponsor liquidity concerns from repo and credit line margin calls appear to have subsided as pricing stabilized and defaults were contained.
• No KBRA-rated CRE CLO has failed a note protection test as of the August remittance period, while no issuers have purchased meaningful numbers of defaulted loans.
• KBRA made no downgrade actions or Watch Placements in the sector; in fact, one or more classes in two deals rated by KBRA were upgraded, mainly due to loan paydowns, since the onset of the pandemic. This compares with KBRA downgrade actions or Watch Placements effectuated across 20% of our rated CMBS transactions.

That said, relief in the form of forbearance and other temporary loan amendments helped to buoy CRE CLO performance, allowing borrowers to maintain their “current” loan status. As temporary relief measures expire and reserves (if used to support the loan) are depleted, we could see a shift in performance.

In this report, we explore the performance of the CRE CLO sector and look at sponsor liquidity, note protection tests, and the management of credit risk and defaulted loans.

Click here to view the report.

Related Publications

• Pandemic CMBS: Originating Through the Contagion
• CMBS Trend Watch: August 2020
• CMBS Loan Performance Trends: August Update
• CRE Sector Trends Upended by Pandemic Disruptions

About KBRA and KBRA Europe

KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe is located at 6-8 College Green, Dublin 2, Ireland.