Commercial Real Estate CDOs Set for More Downgrades, Special Serviced Loans Rise
Moody’s Investors Service foresees more downgrades than upgrades during the the second half of the year for collateralized debt obligations in commercial real estate, as the increase in defeasance rates is greatly accelerating. Analysts said cash flows from CRE continue to remain stressed and ratings actions reflect higher risk associated with declining debt-service coverage ratios. During the second quarter, Moody’s downgraded 753 CMBS transactions while a mere 35 transaction were upgraded. Defeasance activity -- that is when a borrower in a commercial real estate securitization substitutes some type of capital-generating collateral in lieu of a hard payment -- for the first half of 2010 was almost 300% higher than during the same period in 2009 and is equal to almost 80% of the level achieved for full-year 2009. The largest shares of defeasance in order by vintage are 2005, 2002 and 2004, at 16%, 15% and 14%, respectively, according to the Moody's report. Additionally, the mulitfamily sector made up the largest share of collateral in defeasance. Moody’s also unveiled new metrics to measure base expected loss and stress scenario loss that represent a "potential performance path under defined uniform conditions" to "shed additional light" on refinance risk. While 62.4% of five-year loans that matured during the first half were paid in full, 6.2% paid off with losses and Moody’s expects short-term mortgages maturing this year face significant refinancing challenges due to little or no amortization in many of the loans. Meanwhile, Fitch Ratings said almost half of an expected 126 CMBS loans set to mature in September are already in special servicing and analysts expect the trend to continue into next year. Fitch said 17% of the 2,198 CMBS loans maturing in 2011, or $26.5bn, are already in special servicing. "Most maturing loans already in special servicing are either delinquent or in foreclosure," said Fitch senior director Adam Fox. "Recent vintage loans have little or no amortization and are maturing in a higher mortgage rate environment with stricter underwriting standards" making it difficult to refinance the loans. Write to Jason Philyaw.