The continued disruption in the commercial real estate space may be about to claim a new victim. An email from Fitch Ratings today warns that iStar Financial -- a real estate investment trust with $11 billion of undepreciated assets and $2.2 billion of undepreciated book equity -- is facing imminent default. "Absent a significant improvement in commercial real estate fundamentals which would result in iStar receiving a substantial amount of loan repayments from its borrowers, it is inevitable that the company will need to effect a coercive debt exchange (CDE) with its second lien noteholders to avoid bankruptcy," according to the email from Fitch Ratings. In an email from iStar, Andrew Backman, the senior vice president of investor relations downplayed the significance of the Fitch declaration. "Fitch stated that if the company effected a coercive debt exchange (CDE) with its second lien note holders, Fitch would consider it a default as outlined in Fitch's global criteria report Coercive Debt Exchange Criteria," he said. "A Fitch default is not a default under any of our loan agreements.  iStar continues to operate its business as usual.  We have ample near-term liquidity and we continue to assess all of our various options to re-align our asset and liability maturities." Fitch has now downgraded iStar’s Issuer Default Rating (IDR) as follows: --IDR to 'C' from 'CC'; --First priority credit agreement to ‘B-/RR1’ from ‘B/RR1’; --Second priority credit agreement to ‘CCC/RR2’ from ‘B-/RR2’; --2011 second lien notes to ‘CCC/RR2’ from ‘B-/RR2’; --2014 second lien notes to ‘CCC/RR2’ from ‘B-/RR2’. Fitch has affirmed the following security ratings at their current level, as ‘C’ is the lowest assigned financial obligation rating: --Unsecured revolving credit facilities at 'C/RR5'; --Senior unsecured notes at 'C/RR5'; --Convertible senior floating-rate notes at 'C/RR5'; --Preferred stock at 'C/RR6'. Fitch’s estimates of iStar's liquidity to currently be in a substantial cash shortfall. The rating actions are also driven by continued weakening of the quality of iStar's loan portfolio. For the quarter ended June 30, 2010, iStar recognized $109 million of loan loss provisions, and iStar has recognized over $750 million of loan loss provisions over the last 12 months. As of June 30, 2010, non-performing and watch list loans collectively represented nearly 54% of iStar's total gross loan portfolio, compared with 50% as of June 30, 2009. "Challenging property-level fundamentals, combined with the decline in commercial real estate values over the past several years, have decreased the ability of iStar's borrowers to repay loans," Fitch states. The rating agency predicts iStar will have trouble monetizing its portfolio in the current environment. And facing a liquidity deficit of over $2 billion may lead to an inability to fund obligations from upcoming debt maturities over the next 24 months. 58% of iStar's unencumbered loans and other lending investments are non-performing, Fitch added. Write to Jacob Gaffney.