Delinquencies on commercial real estate loan collateralized debt obligations (CREL CDOs) rose minimally in March to 13.6% from 13.4% in February, according to the latest index results from Fitch Ratings. However, the dollar balance of delinquent assets has remained virtually the same as February. Fitch Ratings attributes the increased rate is a result of the continuing decline in the total collateral balance as a result of realized losses and repayments.
Total collateral was down approximately 22% in March from its original fully ramped balance. Reinvestment in new assets was minimal with only seven of the 33 rated CREL CDOs still in their reinvestment periods. Further, of those seven, five were failing overcollateralization (OC) tests, and any principal proceeds must generally be used to pay down the senior classes of the transaction.
In total, Fitch Ratings found that CREL CDO realized losses that are approximately 11% of par (based on original fully ramped collateral). Modeled expected losses on Fitch Ratings' portfolio averaged 37.5%, as of each CDO's last review. As the agency has already anticipated high losses in its reviews as well as considered previously accumulated losses, further realized losses are not expected to impact most CREL CDO ratings. However, ratings on the most junior classes remain subject to volatility, as future realized losses may differ from current expectations on specific CDOs.
New delinquent assets in March consisted of five new matured balloon loan interests and two term defaults. Offsetting these new delinquencies, eight assets were removed from the index in the month, including two modified/extended loans, three formerly repurchased assets, and three other assets disposed of at a loss.
CREL CDO asset managers reported approximately $35 million in realized losses in March. The largest loss, which totaled $20.7 million, was a full loss on a mezzanine interest backed by a mall located in Phoenix. A junior commercial mortgage-backed securities bond backed by the same asset, and contributed to an unrelated CDO, also realized a full loss.
In March, 31 of the 33 CREL CDOs rated by Fitch Ratings reported delinquencies ranging from 1.3% to 58.1%. Additionally, 39% of the rated CREL CDOs were failing at least one OC test. Failure of OC tests leads to the cutoff of interest payments to subordinate classes, including preferred shares, which are typically held by the CDO asset managers. These proceeds, along with collected principal proceeds, are then diverted to pay down the senior classes.