Monday, August 17, 2009

Fitch: Distressed Asset Sales Offset U.S. CREL CDO Delinquency Drop

NEW YORK CITY, NY, Aug. 17, 2009-- Realized losses continue to rise for U.S. CREL CDOs as delinquencies declined to 7.6% from 8.2% in June, according to the latest CREL CDO Delinquency Index (CREL DI) index results from Fitch Ratings.

On average, 2.7% of the CDO par balance has been lost to date due to distressed asset sales and discounted payoffs. Had the loans, which were resolved at a loss over the past three months (1.5%) remained in the transactions, the CREL DI would have exceeded 9% this month.

‘Though the number of distressed sales to third parties and discounted payoffs for troubled CDO assets is on the rise, many of these losses have been masked as managers often use the proceeds to purchase new assets at an even deeper discount, which builds par’ said Senior Director Karen Trebach. ‘Par building can preserve equity distributions as overcollateralization tests are either cured or maintained.’

Because preferred shares are not written down for CDOs, collateral losses are not always apparent to investors. Fitch determined that 21 of the 35 rated CREL CDOs had realized losses totaling over $600 million, or approximately 2.7% of the fully ramped CDO balances. Individual CDO loss rates range from 0.4% to as high as 20% for one CDO, which had a high percentage of losses attributed to subprime RMBS asset sales.

In the July reporting period, 12 troubled assets were disposed of through either third party sales or discounted payoffs. The average recovery on these loans was approximately 46% resulting in realized losses to five different CREL CDOs totaling $95.3 million.

Over the same one month period, CDO managers reported approximately $97 million of par building from discounted asset purchases.

Although the total dollar amount is similar to the total realized losses for the month, the par building has not necessarily occurred in the same CDOs as the realized losses.

In addition, a couple of issuers purchased assets at par. Currently, a total of 10 of the 35 Fitch rated CREL CDOs are failing at least one OC test.

At least seven additional CDOS are within 1.5% of breaching an OC test. As assets continue to near maturity, the pace of impaired assets in individual CDOs is expected to increase, placing additional pressures on OC ratios. 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.

Faced with limited options, some managers are also managing OC ratios by extending and/or restructuring loans. In the July 2009 reporting period, asset managers reported 48 loan extensions (4.2% of loans), which is nearly double the prior month’s total of 26.

These extensions are reducing the number of matured balloon loans. However, many of these extensions and modifications merely have the effect of postponing inevitable losses.

Fitch anticipates high default rates within CREL CDOs as these loans mature into the trough of the current commercial real estate cycle. As such, Fitch is currently finalizing review methodology and anticipates significant downgrades to all Fitch rated CREL CDOs in the coming months.

Karen Trebach +1-212-908-0215 or
Stacey McGovern +1-212-908-0722, New York.
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278;

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