Fitch Ratings downgraded iStar Financial’s (SFI) Issuer Default Rating and reported that default appears probable for the commercial real estate investor. Fitch cited a weakened liquidity position for iStar, a Real Estate Investment Trust (REIT) that raises()sending the rating to double-C from a B-minus, and Fitch removed iStar from Rating Watch Negative, according to a release. In addition to the liquidity crunch, a Coercive Debt Exchange (CDE) figures into the probable default. A CDE occurs when impending bankruptcy or depleted liquidity forces an issuer to restructure its debt, but even without the CDE, Fitch believes that a default is probable. The downgrade comes after iStar’s Q209 report, which revealed a weakening quality of iStar’s loan portfolio. For the quarter, iStar reported $435m in loan losses and $1.3bn over the last 12 months, according to Fitch. Non-performing and watch-list loans accounted for more than half of iStar’s loan portfolio, which grew from 43% at the end of March, 2009. Fitch continued to forecast further increase in loan losses and non-accrual loans for the rest of 2009 given the shortage of capital available in commercial real estate debt capital markets. Essentially, borrowers can’t repay loans and the difficult landscape makes it difficult to sell assets, according to Fitch. This constricts iStar’s cashflow, which will likely result in liquidity shortfall between now and the end of 2011, snowballing in probability given iStar’s future funding obligations and debt maturities. To make things worse, iStar has expended all term loan capacity and revolving credit facilities, according to Fitch, forcing the investment firm to rely on asset sales and loan repayments for liquidity. If iStar receives 30% if its payback between now and the end of 2011, the liquidity deficit would climb over $3bn if it could not sell any of its assets. Write to Jon Prior.