Fitch: Commercial CDO Delinquencies Take A Dip

Posted on July 21, 2011

After Fitch Ratings predicted that CMBS fundamentals are slowly stabilizing this year, the latest index results from the global ratings agency shows that delinquencies for US commercial real estate loan collateralized debt obligations (CDOs) saw their largest decline in almost four years. The new report notes that late-pays declined to 12.6% in June from 14.1% in May, making it the most significant drop since October 2007.

One of the reasons for the delinquency decline is related to the disposal of 25 troubled assets from the index this month. The removed assets included: four matured balloons, which were recently extended; two term defaults brought current; two loans that were repurchased in the prior month; three defaulted B-notes; six impaired CMBS with prior interest shortfalls; four mezzanine interested foreclosed out; four assets sold at discounts from 21% to 54%.

Fitch notes that many of these resolutions resulted in better than expected recoveries; over half were resolved without losses to the CDOs themselves. These variations are common, explainsStacey McGovern, director at Fitch Ratings, who says in a statement: “Like CMBS, CREL CDOs are likely to remain somewhat volatile with significant month to month fluctuations as new loans become delinquent and delinquent loans become resolved.”

Throughout June, CREL CDO asset mangers reported realized losses of around $90 million from the disposal of defaulted and credit-impaired assets, the report states. In the individual property sectors, non-cash flowing property types like construction, condo conversion and land loans have the highest percentage of defaulted assets, with delinquency rates ranging from 20% to 55%. Conversely, office–the biggest property types–has the lowest delinquency rate at 8%.

“The first three property types (construction, condo, and land) generally do not have any cash flow from the property to cover debt service so once interest reserves are burned through, the loans default; unless the sponsor comes out of pocket, which is unlikely as these property types have had some of the largest declines in property values over the last few years,” McGovern says in an e-mail to “With respect to multifamily’s high rate: There are a few large defaults, including the Stuyvesant Town loan, which have driven the multifamily rate above average.”

Fitch’s universe of CREL CDO rankings currently encompasses approximately 1,000 loans and 400 rates securities/assets, with a total collateral balance of $19.7 billon.

By Jacqueline Hilavenka, Globe St.