CMBS borrowers capitalize on current market conditions
Not all commercial mortgage-backed securities are reaching special servicing, according to research by Fitch Ratings. In fact, the firm said, more borrowers are capitalizing on market conditions and utilizing long-term alternatives to default. Barclays Capital agrees, saying in its weekly CMBS report that the short part of the capital structure continued to soften, as "additional reports of better-than-expected resolutions" continued to emerge. When a commercial mortgage-back security is transferred to a special servicing firm, the loan is already in distress. The majority of CMBS loans that get transferred are classified as imminent default. Fitch said that classification is too overarching and decided to monitor the CMBS loans it rates to identify the terms under which a loan is transferred. "While some borrowers are taking proactive measures to avert defaults on soon-to-mature loans, others are simply looking to capitalize on current market conditions," said Adam Fox, senior director at Fitch. "Some of these more opportunistic measures include early requests to extend the loan term, as well as inquiries to bring down the leverage point via forgiveness of principal." The rating agency reported 21 loans with a balance above $20 million were transferred to specialty servicers in October, five of which had balances over $100 million. Three were classified as monetary defaults, two were technical defaults and 16 were imminent defaults. According to Fitch, the three largest loans that transferred due to imminent default did so as strategy to capitalize on market conditions. The largest loan, a $187 million loan secured by a one million square foot office property in New York, requested a loan modification in lieu of its lease expiration. The modification will cause a temporary decline in cash flow. The second largest loan was a $178 million loan secured by 1,906 rooms in eight full-service Embassy Suite hotels. The borrower requested a maturity extension from the February 2011 scheduled mature date in light of a challenging refinance market, Fitch said. The third loan, $165 million backed by 5,600 rooms in 42 hotels, was transferred to special services because of financial hardship and is now in the second of three extension periods. The loan is due to mature in June 2012 and currently managed with cash flow held by the trust. Write to Christine Ricciardi.