NEW YORK CITY-Having yo-yoed up and down over the past severalmonths, delinquency rates for commercial real estate CDOs went backup over 12% for June, Fitch Ratings reported Friday. The ratingsagency pinned the increase on $136.9 million in asset managerrepurchases of troubled assets.

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Nine months ago, Fitch’s CREL CDO delinquency index stood at8.7%. “CREL CDO delinquencies have more than tripled sinceSeptember of last year,” senior director Karen Trebach said at thetime. While the increases since September 2009 have been far moregradual, and have just as frequently been offset by factors thatlowered the delinquency rate for a given month, the rate hasexceeded 10% each month since October, peaking at 13% this pastDecember.

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June’s increase to 12.2% follows a decline to 11.6% in May, amonthly drop that Fiotch attributed to asset managers continuing toextend loans and trade out credit risk assets, and slightly exceedsthe 12.1% delinquency rate recorded in April. In reporting the Juneindex, Fitch notes that asset managers are continuing to activelyrepurchase defaulted and credit-impaired assets from CDOs.

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“Resolving credit-impaired assets at a loss to the CDO hasbecome a consistent trend among asset managers,” director StaceyMcGovern commented in April. “Further, not all of thecredit-impaired assets are delinquent at the time of theresolution.”

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In June, seven whole loans totaling 58 basis points wererepurchased from three different CDOs, compared to seven bps forMay and 25 bps for April, Fitch says. Aside from these repurchases,new delinquent assets include four term defaults, six maturedballoons and 11 credit-impaired rated securities. There were 35loan extensions reported in June, including two former maturedballoon loans.

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Fitch says realized losses of about $39.4 million were reportedin June from the disposal or resolution of other troubled assets,down from $50 million in May. The highest asset loss to a CDO was$15 million, which reflected the impact on a real estate bank loanof a bankruptcy reorganization plan. Another high realized loss wasrelated to the discounted payoff at approximately 50% of par of amezzanine loan interest on a mall in Hawaii.

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Losses were also incurred on the sale of junior mezzanine andB-notes. Anecdotally, the agency says, managers have noted greaterinterest from prospective loan purchasers with loan-to-ownstrategies. The reasoning, Fitch says, is that acquiring juniorportions of the capital stack of a loan can provide an opportunityto gain control over a collateral asset.

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Of the 35 CREL CDOs rated by Fitch Ratings, 34 reporteddelinquencies in June that ranged from 1.2% to 39.8%. Additionally,15 Fitch-rated CREL CDOs in June were failing at least oneovercollateralization test, one less than the total for May.Failing OC tests generally leads to the cutoff of interest paymentsto subordinate classes, including preferred shares, which aretypically held by the CDO asset managers.

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Twenty-four percent of the delinquent loans in the June indexwere backed by multifamily properties, which comprise 17% of theloans in the Fitch-rated CDO universe. The second largest pool ofdelinquent loans occurred in the office sector at 13%, althoughoffice represents 24% of the CDO universe as rated by Fitch. Wholeloans and A-notes comprise 51% of the Fitch-rated CDO universe and61% of the collateral in the June delinquency index.

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The Fitch universe of 35 rated CREL CDOs currently encompassesapproximately 1,100 loans and 350 rated securities/assets with atotal balance of $23.8 billion. The CREL delinquency index includesloans and assets that are delinquent for 60 days or more, as wellas matured balloon loans and the current month’s repurchasedassets.

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