Finance CMBS
Nov 28, 2007
By: Amanda Marsh, Associate Editor
Bond default performance for U.S. CMBS will show some resilience and remain low in the new year, even with projected higher loan defaults, a Fitch Ratings report noted today.
Next year will be an inflection point for CMBS, with loan defaults projected to increase more than 50 percent, even with continued strong underlying real estate fundamentals. This figure may even double if the broader real estate markets start to show signs of weakness, the report said.
"We've seen a slowdown in acquisitions, which is what drives financing and refinancing," Susan Merrick (pictured), managing director and head of Fitch's CMBS group, told CPN today. "We also expect that underwriting will come more conservatively, which changes the amount lent and changes value, to some extent." However, she noted that Fitch does not see evidence of economic drivers declining.
Despite these predictions, Fitch expects CMBS bond defaults to remain low as loan defaults correct to a level more consistent with long-term expectations, and that the credit enhancement levels for its existing transactions provide adequate support from these expected additional loan defaults.
The report explained that CMBS loan defaults have been extremely low in recent years due to the healthy commercial real estate market and the availability of both debt and equity capital. However, technical factors created by a decline in origination will cause CMBS default rates to increase by approximately 20 basis points next year. And commercial real estate performance continues to be strong; Fitch's October loan delinquency index only recorded 29 basis points of delinquencies.
CMBS issuance volume was approximately $200 billion in 2006, but the first half of 2007 eclipsed that level, Fitch noted. However, the credit markets volatility has resulted in an approximately 75 percent decline in originations during the second half of 2007; this volume is expected to continue during 2008, with total volume expected to be half that of 2007's at $125 billion.
Unlike the issuances, however, real estate fundamentals are more difficult to predict, the report said. "Fitch recognizes that the tremendous liquidity which existed in the capital markets in recent years contributed to better loan performance," it continued. "If real estate fundamentals decline, overleveraged properties would suffer the most precipitous decline." That said, the agency would envision a further 20 basis point increase in delinquencies even in a "mildly stressed" real estate environment.
The report noted that the impact of rising loan defaults in 2008 will result in loan performance more closely resembling historical loan default rates, and given the credit support on Fitch-rated CMBS bonds, the impact of such loan defaults "should be minimal." It furthered that annual defaults will increase by 50 percent next year, as its fixed-rate portfolio increases from its current weighted average age of 3.7 years to 4.7 years. Fitch said that it would review ratings to ensure they "accurately capture the performance of underlying loans," and if defaults exceed these projects, would take rating actions as needed.
Fitch released its outlook only two weeks after Moody's Investors Service forecasted a similar halving of CMBS issuances in 2008, as well a slow first half of the year. It also predicted that CMBS delinquencies could rise from their current 0.5 percent rate to 1 percent or more during the next year.
Overall, the tumultuous credit markets will last until 2009, a panel of experts said yesterday at The Urban Land Institute Regional Trends Conference in New York. According to a Reuters report by Ilaina Jonas, banks have not been able to unload $250 billion worth of loans used to finance leveraged buyouts, as buyers' "fear factor grew as defaults of home loans made to those with risky credit histories popped up in all kinds of investments, in what has become to be called an FTD--a financially transmitted disease."
By: Amanda Marsh, Associate Editor
Bond default performance for U.S. CMBS will show some resilience and remain low in the new year, even with projected higher loan defaults, a Fitch Ratings report noted today. Next year will be an inflection point for CMBS, with loan defaults projected to increase more than 50 percent, even with continued strong underlying real estate fundamentals. This figure may even double if the broader real estate markets start to show signs of weakness, the report said.
"We've seen a slowdown in acquisitions, which is what drives financing and refinancing," Susan Merrick (pictured), managing director and head of Fitch's CMBS group, told CPN today. "We also expect that underwriting will come more conservatively, which changes the amount lent and changes value, to some extent." However, she noted that Fitch does not see evidence of economic drivers declining.
Despite these predictions, Fitch expects CMBS bond defaults to remain low as loan defaults correct to a level more consistent with long-term expectations, and that the credit enhancement levels for its existing transactions provide adequate support from these expected additional loan defaults.
The report explained that CMBS loan defaults have been extremely low in recent years due to the healthy commercial real estate market and the availability of both debt and equity capital. However, technical factors created by a decline in origination will cause CMBS default rates to increase by approximately 20 basis points next year. And commercial real estate performance continues to be strong; Fitch's October loan delinquency index only recorded 29 basis points of delinquencies.
CMBS issuance volume was approximately $200 billion in 2006, but the first half of 2007 eclipsed that level, Fitch noted. However, the credit markets volatility has resulted in an approximately 75 percent decline in originations during the second half of 2007; this volume is expected to continue during 2008, with total volume expected to be half that of 2007's at $125 billion.
Unlike the issuances, however, real estate fundamentals are more difficult to predict, the report said. "Fitch recognizes that the tremendous liquidity which existed in the capital markets in recent years contributed to better loan performance," it continued. "If real estate fundamentals decline, overleveraged properties would suffer the most precipitous decline." That said, the agency would envision a further 20 basis point increase in delinquencies even in a "mildly stressed" real estate environment.
The report noted that the impact of rising loan defaults in 2008 will result in loan performance more closely resembling historical loan default rates, and given the credit support on Fitch-rated CMBS bonds, the impact of such loan defaults "should be minimal." It furthered that annual defaults will increase by 50 percent next year, as its fixed-rate portfolio increases from its current weighted average age of 3.7 years to 4.7 years. Fitch said that it would review ratings to ensure they "accurately capture the performance of underlying loans," and if defaults exceed these projects, would take rating actions as needed.
Fitch released its outlook only two weeks after Moody's Investors Service forecasted a similar halving of CMBS issuances in 2008, as well a slow first half of the year. It also predicted that CMBS delinquencies could rise from their current 0.5 percent rate to 1 percent or more during the next year.
Overall, the tumultuous credit markets will last until 2009, a panel of experts said yesterday at The Urban Land Institute Regional Trends Conference in New York. According to a Reuters report by Ilaina Jonas, banks have not been able to unload $250 billion worth of loans used to finance leveraged buyouts, as buyers' "fear factor grew as defaults of home loans made to those with risky credit histories popped up in all kinds of investments, in what has become to be called an FTD--a financially transmitted disease."
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