Here’s your monthly dose of CMBStress — courtesy of ratings agency Realpoint.
After a small blip in July, delinquent CMBS resumed its upward decline, reaching a staggering $31.73bn in September — up 583 per cent from a year ago. That works out to be a delinquency ratio of 3.94 per cent, over seven times the 0.54 per cent reported a year prior. You can see why FDIC, the Fed, et al are so concerned about commercial real estate (CRE), having issued their guidance on “prudent” CRE loan workouts late last week.
A lot of that workout guidance is aimed at loans that are coming due but perhaps can’t be refinanced because the value of the property has fallen below the loan amount. That’s an issue present in the CMBS market as well, where balloon payments (large, lamp-sum payments) are looming. And on that Realpoint notes:
- Balloon default risk is growing rapidly from highly seasoned CMBS transactions for both performing and non-performing loans coming due as loans are unable to payoff as scheduled.
- In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, due mostly to a lack of refinance proceeds availability. This scenario has added to loans with distressed collateral performance in today’s credit climate.
- Within this area of concern, large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties that are soon to reach their final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
- Aggressive pro-forma underwriting was the norm on loans originated for 2005 through 2008 vintage transactions, many with debt service / interest reserves required at-issuance. The balance of such reserves are declining more rapidly than originally anticipated, and many are close to default or transfer to special servicing (if not already there).
- Exacerbating such concern is the large unpaid balance related to loans underwritten with DSCRs between 1.10 and 1.25 as any decline in performance in today’s market could cause an inability to meet debt service requirements. Further stress on in-place DSCRs hovering around breakeven is expected on partial-term interest-only loans that will begin to amortize in the near future, or ones that have recently converted.
- Falling commercial real estate values and diminishing equity in collateral properties is projected to prompt struggling borrowers with marginal collateral performance to hand over the keys and walk away from properties.
Commercial jingle mail.That seems apt in the run-up to Christmas, actually.
Related links:
CMBStress resumes – FT Alphaville
Ballooning CMBS payments – FT Alphaville