Commercial CDO delinquencies begin to take toll on investors
Delinquencies within collateralized debt obligations in commercial real estate loans closed 13% higher in 2010 than a year earlier, according to Fitch Ratings. The credit rating agency said the rate of December delinquencies rose to 13.6% from 12.7% in November, due primarily to higher defaulted REIT debt and increased credit impairments in CMBS. Newly delinquent loans in December included one matured balloon, one term default and 10 credit risk securities. Only one delinquent loan was cured. Resolving these delinquent loans will sometimes call for a principal write-down on the loan. But this sort of workout can lead to further downgrades on the bonds, according to Fitch. On Friday, the rating agency downgraded 45 bonds in 33 U.S. CMBS transactions to "D" for that very reason. The bonds were already rated in the junk categories between "B" and "C", indicating Fitch expected a default. However, Fitch said the commercial real estate loan/CDO delinquency rate may not have an impact on ratings. "The current rise in the delinquency rate is not expected to impact ratings as Fitch Ratings' analysis of each CREL CDO takes into account potential increases," said Stacey McGovern, Fitch director. "Ratings on the most junior classes, however, remain subject to volatility as losses are realized, which may differ from expectations." The agency rates 34 CREL CDOs that collectively include about 1,100 loans and 400 securities with an aggregate balance of $20.9 billion. Commercial delinquencies are taking a toll on the market in the New Year, according to analytics firm Trepp. Analysts said shortfalls on the "Beacon Seattle and DC Portfolio" have now reached the D class. The Beacon loan is the second largest in CMBS at $2.64 billion and received a loan modification in December. The loan was granted a five-year maturity extension, and the interest rate on the loan dropped to 3% from 5.97%. The note is split across six deals from 2007. "The (deal) saw interest shortfalls jump drastically due to the modification," Trepp said. "Prior to January, shortfalls had only reached up to the M class. The January remittance report saw shortfalls smack another eight classes." Trepp told investors to be conscious of large shortfalls on this investment, from the J to the D classes, but added, "at some point these shortfalls will get paid back and the pay back could be substantial." Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.