Loan Resolutions Help Offset New Defaults

NEW YORK CITY-August was a good news/bad news month for legacy CMBS. On the one hand, the month’s tally of new defaults pushed the delinquency rating up by 21 basis points or more; on the other hand, this was offset by a record number of loan resolutions, says Fitch Ratings.

The ratings agency said Friday that $2.1 billion of CMBS loans disappeared from its delinquency index last month through a combination of liquidations, repayments upon refinancing, corrections and modifications. Resolutions from the index included three loans with balances of more than $100 million, according to Fitch.

However, Trepp said last week that the 21-bps rise in CMBS defaults pushed the delinquency rate up to 8.92% as of August 31. Fitch, working within the context of loans which it rates, puts the August default increase at 23 bps and the overall delinquency rate at 8.48%, with 2,931 loans totaling $37 billion that are at least 60 days delinquent. About 76% of the Fitch-rated CMBS universe consists of loans that continue to maintain a “stable” outlook, although 15% are trending negative and 3% are considered distressed.

The August tally of new delinquencies, which comes after two consecutive months of moderating default rates, gives ammunition to those who believe that the commercial real estate crisis is far from over, according to Trepp. Similarly, Fitch senior director Adam Fox says in a statement, “Though special servicers are working out loans at an increased rate, the volume of new delinquencies has not yet subsided. Highly leveraged loans originated at the market's peak continue to default as borrowers seek modifications or hand back the keys to underperforming assets.”

Just as the resolution of loans in August included three with balances of $100 million or greater, so the roster of new delinquencies also included three loans in the nine-figure range that defaulted during their terms, along with a pair of $100-million-plus loans that defaulted at maturity. The largest of these was a pair of pari passu notes totaling $825.4 million and secured by 45 hotel properties in the Innkeepers Portfolio.

Lodging REIT Innkeepers USA filed a prearranged bankruptcy plan in July. Under the plan, a subsidiary of Lehman Brothers Holdings, one of Innkeepers’ largest secured creditors, will take control in exchange for the forgiveness of $238 million in debt, according to the Wall Street Journal. Meanwhile, though, Fitch notes that the portfolio is in danger of having several franchises terminated due to the borrower's failure to complete property improvement plans.

The second largest of the new term defaults was also lodging related: a $145-million loan on the Hyatt Regency Bethesda in Bethesda, MD. In fact, 36% of the new delinquencies, or $1.1 billion worth, occurred in this sector, pushing the hotel-specific delinquency rate past 20%, Fitch says.

Hotel’s month-over-month increase in CMBS defaults was 216 basis points, reaching 20.8% as of the end of this past month. Multifamily rose from 13.87% in July to 14.18% in August, while industrial rose to 5.55% from 5.2%. Office and retail both saw slight decreases in their CMBS default rates, with retail diminishing to 6.11% from 6.35% in July and office losing a pair of basis points to finish the month at 5.06%.