CMBS delinquencies rise as larger loans default

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?What began as a weakness in the performance of smaller properties located in tertiary markets now includes larger collateral in secondary and primary markets,? said Susan Merrick, Managing Director and U.S. CMBS group head for Fitch Ratings. ?Highly levered loans on transitional assets that were originated at the height of the market are proving particularly susceptible to performance default, as the deepening recession continues to make stabilizations according to schedule increasingly unlikely.?

Commercial mortgage backed securities (CMBS) loan delinquencies rose to 0.88 percent in December 2008, according to Fitch Ratings. The increase is due in part to defaults on two loans with outstanding balances greater than $100 million, following a November reading which featured two defaults in excess of $70 million. The loan delinquency index currently includes 20 loans with balances of $25 million or more. Six of those 20 loans became delinquent in December. The December delinquencies included a $125.2 million loan secured by a retail property located in Corona, CA and a $104 million pari passu note backed by a portfolio of two hotel properties in Tucson, AZ and Hilton Head, SC. In each case, the respective loan sponsor was experienced with the property type, but cited economic hardship due to market deterioration as the cause of inability to meet debt obligations. Both loans were securitized in early 2008.

Fitch does not provide additional details regarding the defaulting loans, however, at least one deal involving Tucson-area and South Carolina hotel properties has made the news recently. In late December, the Arizona Daily Star reported the Transwest Partners/NCH Corp. was close to defaulting on a $209 million loan involving the Westin La Paloma Resort and Spa and another resort in South Carolina. Transwest/NCH has already defaulted on a $21 million supplemental loan for the properties and has struggled to make payments on the loan because of cancellations.

The average loan size of delinquencies within the Fitch rated universe now stands at $8.2 million. This compares to an average loan size of $6.4 million for the same subset in December 2007. The 2008 vintage defaults, like those of other recent vintages, are rising at a faster pace compared to historical trends. Macroeconomic contraction, coupled with the higher leverage that is characteristic of recent vintages, has pushed up default rates for loans in 2006 and 2007 vintages. As of year-end 2007, 0.96 percent of Fitch-rated loans issued in 2006 and 0.41 percent of those issued in 2007 were 60 days or more delinquent, compared to the 10-year average default rate of 74 bps. Fitch expects that the accelerated pace of defaults witnessed in fourth quarter-2008 and additional delinquencies on larger loans is likely to continue into 2009, bringing the index to approximately 2 percent by year-end.