Floating-Rate CMBS Heads for Crash Landing

NEW YORK CITY-In one of the most sweeping CMBS assessments year-to-date, Fitch Ratings has placed $20.6 billion in bonds from 33 floating-rate CMBS transactions on Rating Watch Negative. Britt Johnson, senior director of CMBS performance analytics at the ratings agency, tells GlobeSt.com this action covers 404 CMBS classes and represents 77% of the Fitch rated, floating-rate, multiborrower universe.

Johnson says approximately 18% of the floating-rate CMBS, or 143 classes worth $4.9 billion, had been placed on watch negativeprior to this action, which Fitch announced late Thursday afternoon. Fitch has also assigned negative outlooks to 22 AAA- and AA-plus-rated classes, totaling $1.1 billion; this action covers another 4% of the Fitch-rated universe of floating-rate CMBS, says Johnson.

Fitch says the watch-negative placements result from the “significant stress” on cash flow that floating-rate loans experienced in 2009, along with the agency’s expectation that cash flows will continue to be stressed for the foreseeable future. “Floating-rate loans are transitional in nature and more susceptible to declining market conditions than stabilized properties typically found in conduit transactions,” the agency says in a release. “Many floating-rate loans have not reached stabilization and/or have experienced significant declines in performance since Fitch’s last rating action. Additionally, many recent vintage floating-rate transactions have high concentrations of hotels, particularly the luxury sector.”

Included in this action are 123 classes rated triple-A and worth $14 billion, 184 classes rated double-A and below and worth $4.9 billion and 97 classes currently rated below triple-B minus and worth $1.7 billion. The institutions that originated the loans include Bank of America, Bear Stearns, Citigroup, COMM Mortgage Trust, Credit Suisse First Boston, Greenwich Capital, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley and Wachovia.

The ratings action occurs days after both Fitch and Moody’s Investor Service reported monthly increases in their respective loan delinquency. Fitch’s latest Loan Delinquency Index showed that late-pays climbed 43 basis points in November to reach 4.29%, while Moody’s Delinquency Tracker showed a 46-bps rise during the month, the largest yet during the recession. Moody’s says the CMBS delinquency rate is now 4.47%.

“Transfers to special servicing of larger loans are occurring before borrowers default on payments,” says Susan Merrick, managing director and US CMBS group head at Fitch, in a release. “Newly delinquent large loans are rarely a surprise.”

Of the 20 largest loans in the Fitch index, 18 were transferred to special servicing on average 9.3 months prior to becoming 60 days delinquent, and ranged from one to 80 months prior to delinquency. The agency says servicers frequently are transferring loans before delinquency for imminent default when borrowers either request payment relief or notify the servicer of their inability to remain current. Loans are also being transferred when there are significant performance declines that indicate likely future delinquency, Fitch says.

Leading the way in the Moody’s index are hotel properties; the delinquency rate on hospitality-based loans rose 160 bps during November to 7.8%. The multifamily sector increased more than 90 bps to end the month at 7.4%. Industrial-backed loans increased 28 bps to 3.11% in November, while office property delinquency rose 25 points to 2.95%.

In its Structured Finance Outlook report issued earlier this month, Fitch says its main concerns for CMBS in 2010 remain “protracted illiquidity and refinance risk.” The agency says it expects the loan delinquency rate to hit 6% by the end of the first quarter next year, and peak at 12% by the end of 2012.

For CMBS of more recent vintage, losses will remain elevated, says Fitch, which is also anticipating downgrades of pre-2006 securities into next year. However, says managing director Bob Vrchota in a release, the magnitude of downgrades for earlier-vintage CMBS is expected to be less severe “due to seasoning, defeasance and the loans generally not underwritten as aggressively as those at the peak of the market.”