Las Vegas Commercial Real Estate - Las Vegas NV

Conduit Loans On Track to Reach 11% By Year End; CDOs Also Post Higher Delinquency Rate In June

The cumulative default rate on fixed-rate conduit U.S. commercial mortgage-backed securities rose to 9.48% through June 2010 and is on track to reach 11% by the end of the year, according to Fitch Ratings. Delinquencies for commercial loans with collateralized debt obligations (CDOs) also rose in June.

While lenders are cautiously positioning to resume origination of new, more conservatively written CMBS, vintages written during the market peak from 2006 to 2008 at overly optimistic rent assumptions are seeing rising delinquency and default rates. The U.S. CMBS default rate rose 133 basis points from the first quarter and 289 bps from its year-end 2009 study. Large, highly leveraged loans of later vintages are continuing to add to the increased pace of defaults, Fitch said. So far in 2010, 14 legacy loans of more than $100 million have defaulted. The largest newly defaulted loans in second-quarter 2010 were as follows:

* Columbia Center, office, WA, $380 million; 2007 vintage
* Four Seasons Resort Maui, hotel, HI $250 million; 2007 vintage
* World Market Center, other, NV, $225 million; 2005 vintage.

The overall CMBS default rate is on track with Fitch's expectation that it will reach 11% by year-end 2010, the rating agency said.

By property type, hotel and multifamily loans lead the overall cumulative default rate, with a 409- and 498-basis-point change, respectively, from year end 2009. Newly added hotel defaults make up 12% of the year-to-date defaults, with three loans of more than $100 million defaulting. The remaining loans of more than $100 million that defaulted in 2010 are four office and four retail loans.

Office and retail did not see as large of an increase in their overall cumulative default rate due to their large contribution to overall CMBS volume at 29% and 31%, respectively.

The following is a breakdown of year-to-date June 2010 and cumulative defaults by property type:

* Property Type, $ (bil.), Default Rate
* Hotel, $45.40, 17.98%
* Multifamily, $99.48, 14.13%
* Office, $158.57, 6.42%
* Other, $33.91, 4.46%
* Retail, $164.92, 8.25%
* Industrial, $31.28, 7.37%
* Health Care, $5.79, 22.37%
* Total, $539.34, 9.48%.

Delinquencies for U.S. commercial real estate loan (CREL) CDOs rose in June due to $136.9 million in asset manager repurchases of troubled assets, according to Fitch's latest U.S. CREL CDO delinquency index. The June 2010 delinquency rate increased to 12.2% from 11.6% in May.

Asset managers continued to actively repurchase defaulted and credit-impaired assets from CDOs. In June, seven whole loans -- 58 basis points (bps) -- were repurchased from three different CDOs, compared to 7 bps for May and 25 bps for April. Aside from these repurchases, new delinquent assets include four term defaults, six matured balloons, and 11 credit-impaired rated securities. There were 35 loan extensions reported in June, including two former matured balloon loans.

Realized losses of approximately $39.4 million were reported in June from the disposal or resolution of other troubled assets. The highest asset loss to a CDO was $15 million, reflecting the impact on a real estate bank loan of a bankruptcy reorganization plan. Another high realized loss was related to the discounted payoff at approximately 50% of par of a mezzanine loan interest on a mall located in Hawaii.

Losses were also incurred on the sale of junior mezzanine and B-notes. Anecdotally, managers have noted an increased interest from prospective loan purchasers with loan-to-own strategies. Acquisition of junior portions of the capital stack of a loan can provide a purchaser with an opportunity to gain control over a collateral asset.

Of the 35 CREL CDOs rated by Fitch Ratings, 34 reported delinquencies in June, ranging from 1.2% to 39.8%. Additionally, 15 Fitch rated CREL CDOs were failing at least one OC test, which is one less than last month's total.

One CDO manager cured its failure of an overcollateralization (OC) test through its repurchase of defaulted assets. The CDO now has a slight cushion to its lowest 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.

Fitch: CMBS Loan Defaults Continue To Rise