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Fitch: U.S. CREL CDO Delinquencies Tick Down Amid Continued Extensions
NEW YORK-(Business Wire)-May 6, 2008 - A lack of repurchased loans during the month contributed to a slightly lower U.S. commercial real estate loan (CREL) CDO delinquency rate for April 2008 of 0.69%, down from last month's rate of 0.74%, according to the latest CREL CDO Delinquency Index from Fitch Ratings. The delinquency index includes loans that are 60 days or longer delinquent, matured balloon loans, and repurchased assets.
Fitch noted 25 reported loan extensions in April 2008, which is down from last month's total of 32. The majority of the extensions were again a result of options contemplated at closing. However, approximately 40% of these extensions were modifications from the original loan documents. These loan extensions, which are typically between one to six months, continue to reflect the lower available liquidity for CRE loans, especially those typically found in CREL CDOs, which tend to be backed by transitional and/or highly leveraged CRE collateral.
Although the overall delinquency rate for CREL CDOs remains low, it is more than two times the U.S. CMBS March loan delinquency rate of 0.33% reported in April 2008. The CREL CDO Delinquency Index is anticipated to be more volatile than the CMBS delinquency index given the smaller universe of loans and the more transitional nature of the collateral. The Fitch CREL CDO Delinquency Index tracks approximately 1,100 loans and 330 rated securities/assets ($23.8 billion in 35 CREL CDOs), while the Fitch CMBS delinquency index covers approximately 42,000 loans ($562 billion in nearly 500 CMBS transactions).
The April 2008 delinquency index encompasses 11 loans, and includes six loans that are 60 days or more delinquent and five matured balloons. No rated assets were delinquent this month. Of the loans that are 60 days or more delinquent, two loans are in foreclosure (0.08%). Of note is one new matured balloon that previously appeared in the index in February 2008 just prior to a two month extension. Further, two matured balloon mezzanine loans (0.21%), which are included in the index this month, were re-structured and extended during the month. These now current loans are secured by interests in the same New York City office portfolio.
There were no repurchased loans in April 2008. Given the illiquidity in the market and tighter credit conditions for issuers, Fitch continues to predict few repurchases of troubled loans and more workouts within the trust.
Although not included in the delinquency index, 11 loans, representing 0.36% of the CREL CDO collateral were 30 days or less delinquent in April 2008. This statistic is lower than last month's total of 0.47%. Three of these loans were brought current after the cutoff date for this report; the other loans suggest that overall delinquencies may be higher next month.
While no rated collateral was reported delinquent this month, 12 rated assets were considered credit impaired. These assets are mostly subprime RMBS assets and serve as collateral for two CREL CDOs. The impaired assets are equivalent to 0.38% of all CREL CDO assets, but 7.2% and 2.8% of their respective CREL CDOs. The two most junior rated tranches from one of these CREL CDOs are on Rating Watch Negative due to the subprime exposure.
In its ongoing surveillance process, Fitch will increase the probability of default to 100% for delinquent loans that are unlikely to return to current. This adjustment could increase the loan's expected loss in the cases where the probability of default was not already 100%. The weighted average expected loss on all loans (Poolwide Expected Loss, PEL) is the credit metric used to monitor the performance of a CREL CDO. Issuers covenant not to exceed a certain PEL and Fitch determines the ratings of the CDO liabilities based on this covenant. Fitch analysts monitor the as-is PEL over the life of the CDO. The difference between the PEL covenant and the as-is PEL represents the transaction's cushion for reinvestment and negative credit migration.
Fitch currently rates 35 CREL CDOs encompassing approximately 1,100 loans and 330 rated assets with a balance of $23.8 billion. Fitch's U.S. CREL CDO Delinquency Index will be published during the first week of every month based on asset manager and servicer reports collected by Fitch's dedicated CRE CDO surveillance team.
In addition to publishing the monthly Delinquency Index, Fitch is committed to providing ratings that reflect current performance and anticipate future credit events. To achieve this objective, it is imperative that Fitch's CRE CDO surveillance team be provided with relevant and up-to-date loan-level information. Fitch recently published a report entitled 'CRE CDOs: Enhanced Information Provides Early Warning Signals' which is available on the Fitch web site at www.fitchratings.com. In the report, Fitch describes the on-going reports Fitch requests from asset managers, in addition to the monthly delinquency status report, and explains the value of each report.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. Fitch means Fitch, Inc., Fitch Ratings, Ltd. and their subsidiaries, and any successor or successors thereto.
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