CMBS: New Late-Pays Hit Post-Recession Low

NEW YORK CITY—New delinquencies of CMBS hit a post-recession monthly low in January, Fitch Ratings says. That being said, the ratings agency has also flagged a possible pitfall in the higher levels of credit enhancement for new CMBS as deal metrics decline.

In the fourth quarter of 2014, CE on AAA-rated CMBS tranches rose 103 basis points, while for BBB- tranches it increased by 32 bps. Driving Fitch's increase in CMBS credit protection were deals that had poorer debt service coverage ratios and contained more interest only loans.

Specifically, the average DSCR declined to 1.16 from 1.20 in Q3. Meanwhile, IO loan exposure in Q4 was 40% higher than the year-ago period and now stands at 71.5%.

Offsetting these negative factors, Fitch LTV remained stable from the previous quarter and there were fewer loans with additional debt. However, Fitch notes that one fact hidden in the metrics for last year's newly issued securitizations is the increase in subordinate debt. “While the percentage of the pool using sub debt dropped by year end, the dollar amount of debt on loans that had sub debt increased,” according to a Fitch report prepared by managing director Huxley Somerville and his colleagues.

Furthermore, Fitch says it's already seeing leverage increase in this year's CMBS transactions. As leverage continues to increase, CE will increase as well, the ratings agency says.

On the other hand, new CMBS late-pays ended last month at just $274 million, less than half the $554 million that became delinquent in December and a small fraction of the $6.6 billion worth of delinquencies that occurred in January 2010. January closed out with a total of $17.9 billion in Fitch-rated delinquencies, $517 million less than in December, thanks to resolutions outpacing delinquencies by a ratio of nearly three to one.

Although the overall delinquency rate rose 10 bps to 4.72%, Fitch says this was due to an update in its methodology for calculating the rate of late-pays: now excluded are CMBS backed by wireless tower, outdoor advertising and certain other non-traditional transactions. Absent that update, the delinquency rate would have fallen seven bps to 4.55%.

Notwithstanding the declines in new delinquencies, improvements in the overall delinquency rate remained tempered by the inventory of REO assets awaiting disposition. At the end of January, REO assets by stated balance) comprised 3% of Fitch's rated US CMBS universe, or nearly two-thirds of total outstanding delinquencies.

Floating-rate large loans posted by far the highest delinquency rate during January, 15.34%. Next were small balance loans at 5.57% and conduit loans at 5.52%—although the latter comprise both the largest total balance of Fitch-rated delinquent CMBS at $17.3 billion as well as the largest number of loans: 1,039, compared to the 12 large-loan floaters currently in arrears. Seasoned loans have a delinquency rate of just 2.63%, while a single Freddie Mac transaction of $9 million was delinquent last month, for a late-pay rate of 0.02%.

By product type, hotels posted the highest delinquency rate at 6.15%, down from 6.2% in December based on Fitch's prior methodology. Retail deliquency rose two bps to 5.39%, and multifamily's ticked upward one bp to 5.22%. However, if the Peter Cooper Village/Stuyvesant Town loan, containing $2.75 billion in Fitch-rated transactions, were removed from the equation, then apartment delinquency would stand at just 1.9%. Industrial saw the biggest month-to-month improvement, with late-pays declining 21 bps to 5.04%. Office improved by one bp to 5.0%.