HOUSTON—When looking at the impact of oil prices on energy-related CMBS loans, it is important to note that a year ago, prices were hovering around $30 per barrel. Prices have increased since then to approximately $50 per barrel.

Despite the increase in prices, employment in the sector has not fully recovered. With fewer jobs, commercial property fundamentals have continued to weaken. In many cases, property cash flows have been unable to support required debt-service payments and collateral values have fallen below origination proceeds, according to a report by the Kroll Bond Rating Agency.

In a past Kroll Bond Rating report, the agency designated 38 loans ($684 million in principal balance) in CMBS 2.0 as oil-exposed KBRA Loans of Concern (K-LOCs). K-LOCs are loans that are in default or at a heightened risk of default. The number and current principal balance of oil-exposed K-LOCs has climbed markedly since then and currently include 83 loans ($1.1 billion) spread across 65 transactions.

Kroll Bond's loss estimates for the oil-related K-LOCs have also meaningfully risen since the last report, to $307.2 million from $162.3 million with an average loss severity of 77.1%. Previously, Kroll identified two states, North Dakota and Texas with oil-related K-LOCs, but energy-related markets have been expanded as of late.

Of the 83 K-LOCs, 35 are in special servicing and 28 have been assigned appraisal reduction amounts totaling $148 million. The loss implied by the appraisal reduction amounts based upon the total loan exposure ranges from 22.5% to 70.8% with an average of 52.5%, says Kroll.

Despite these loan exposures, optimism is starting to flow back into oil-intensive regions. Oil companies have developed new technologies and initiated operating efficiencies enabling them to make profits at current price levels.

“However, it is likely that the recovery is too little, too late for more than one-third of the oil-related K-LOCs that are more than 90 days delinquent, in foreclosure or real estate owned,” Larry Kay, senior director, Kroll Bond Rating Agency, tells GlobeSt.com. “Per below-loan collateral performance can be significantly affected by event risk, particularly when it is tied to one industry.”

Instant Insights /

Barrel Price Increases Won't Plug CMBS Losses

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