Fitch: U.S. CREL CDO Delinquencies Hold Steady on Extensions & Loan Sales

Fitch Ratings-NY-Sept. 14, 2009: Asset managers continue to extend maturing loans with 54 extensions (4.8% by number) reported in August, which helped to bring U.S. CREL CDO delinquencies down slightly last month, according to the latest CREL CDO Delinquency Index results from Fitch Ratings.

‘While these extensions reduce the number of matured balloon loans entering the CREL DI, they are in many cases merely deferring eventual losses to the CDOs,’ said Senior Director Karen Trebach.

The Fitch CREL CDO Delinquency Index (CREL DI) for August declined to 7.5% from 7.6% last month, with the removal of six loans offsetting the addition of 10 new delinquent ones. Realized losses on the removed loans were $65 million, including a total write off of a $26 million mezzanine loan interest backed by an office portfolio. The average recovery on loans resolved in August was 55.8%. Had the loans that were resolved at a loss over the past four months (1.9%) remained in the transactions, the CREL DI would have been 9.4% this month.

In August, a total of 11 of the 35 Fitch rated CREL CDOs were failing at least one overcollateralization (OC) test, which is one higher than last month. 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.

 Fitch is concerned about the additional stress these asset managers face as their cash flow continues to be
cutoff. If a manager loses its financial wherewithal, it may no longer be able to effectively manage the collateral of the transaction. For example, less financial capacity could lead to the loss of experienced staff, the inability to make protective advances or the weakened ability to defend its position in litigation or foreclosure.

Assets that are 30 days or less past due totaled 2.8% in August led by delinquent interests in the Resorts International Portfolio loan  (41 bps).

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

The universe of 35 Fitch rated CREL CDOs currently encompasses approximately 1,100 loans and 350 rated securities/assets with a balance of $23.8 billion. The CREL delinquency index includes loans that are 60
days or longer delinquent, matured balloon loans, and the current month's repurchased assets.

Contact: 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; sandro.scenga@fitchratings.com