Commercial real estate loan collateralized debt obligation (CDO) delinquencies dropped 33 basis points in November to 2.80% from October levels, according to New York-based credit rating agency Fitch Ratings. The decline is largely due to loan extensions, and marks the first drop in delinquencies since July.
“The continued lack of available capital is driving maturity defaults of commercial real estate loans,” says Karen Trebach, a Fitch senior director. “However, asset managers are continuing to extend many of these loans, with the extension of two large performing matured balloon loans leading to the net decline in this month’s commercial real estate loan delinquency index.”
Asset managers reported 45 new loan extensions in November, compared with 35 in October. Fitch anticipates that there will be an average of 40 extensions per month exercised going forward. In contrast, repurchases of assets by asset managers are down, with none reported in November.
However, asset managers also have been trading credit risk assets out of CDOs at a loss. For instance, in November, one asset manager sold a recently downgraded bank loan out of a CDO at 26% of the par amount. This did not affect the transaction’s credit enhancement much since the asset manager also contributed better performing assets, which were purchased at discounts.
Fitch’s commercial real estate loan delinquency index is based on loans that are delinquent 60 days or longer, matured balloon loans, and the current month’s repurchased assets. Whole loans and A-notes make up 88% of the index.
As the economy continues to suffer, Fitch anticipates an uptick in delinquencies, with loans backed by hotel and retail properties at the greatest risk. These property types make up more than 25% of the total universe of loans in commercial real estate loan CDOs rated by Fitch.