Delinquencies Decline for CRE Collateralized Debt Obligations

Posted on Thursday, June 30, 2011

Delinquencies on U.S. commercial real estate loan collateralized debt obligations (CREL CDOs) decreased last month, reversing the previous month’s increase, according to the latest index results from Fitch Ratings.
From March to April, the delinquency rate rose from 14.1 percent to 14.8 percent. But by the end of May, Fitch says it had fallen back to 14.1 percent.
May’s late-pays dropped as nine new delinquencies were offset by the resolution of 18 formerly delinquent assets.
CREL CDO asset managers reported approximately $73 million in losses from the disposal of defaulted and credit impaired assets last month.
“Realized losses for CREL CDOs are in line with the average monthly amount over the past year,” said Stacey McGovern, Fitch Ratings director.
New May delinquencies consisted of two matured balloon loans, four term defaults, one repurchased asset, and two newly credit impaired securities.
“A large majority of CREL CDO senior classes continue to receive pay down to their most senior classes as the CDOs either exit their reinvestment periods or have periods of over collateralization test failure,” McGovern said.
Only 21 rated CREL CDOs were still in their reinvestment periods in May, and of those, nine were failing at least one overcollateralization (OC) test.
Failure of OC tests leads to the cutoff of interest payments to subordinate classes, including preferred shares, which are typically held by the CDO asset managers. These proceeds, along with collected principal proceeds, are diverted to pay down the senior classes.
In total, 16 Fitch-rated CREL CDOs are failing at least one OC test.
Last month, 32 of the 33 CREL CDOs rated by Fitch Ratings reported delinquencies ranging from 0.8 percent to 45.2 percent.
According to the New York-based ratings agency, the delinquency level is not expected to impact the agency’s CREL CDO ratings as its analysis already takes into account potential future increases. However, ratings on the most junior classes could experience volatility as future realized losses may differ from current expectations.
Fitch Ratings’ 33 rated CREL CDOs encompass approximately 1,100 loans and 400 rated securities/assets with a total collateral balance of $19.9 billion.
The CREL delinquency index includes loans and assets currently 60 days or longer delinquent, matured balloon loans, and the current month’s repurchased assets.
By: Heather Hill Cernoch DS NEWS

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