Structured financial products linked to homebuilding and real estate continued to suffer more downgrades than upgrades in the third quarter and the outlook remains dim, according to a Standard & Poor’s quarterly report on rated global structured securities.
Both areas could experience additional stress if housing demand is further constrained by a deeper, more protracted recession and/or continued turmoil within the home lending industry. We will continue to closely monitor homebuilder cash positions and revolver availability, as liquidity remains critical to surviving this downturn.
Downgrades on residential mortgage-backed securities (RMBS) rose in the quarter ended Sept. 30 as monthly delinquencies and foreclosures on the underlying collateral increased, especially for transactions issued between 2005 and 2007, S & P said.
Commercial mortgage-backed securities (CMBS) also took a turn for the worse in the quarter, with four times as many rated CMBS sinking to speculative-grade status.
Among the other trends for the third quarter:
–Asset-backed securities (ABS) saw fewer downgrades in the third quarter, with S & P lowering its ratings on 119 ABS classes, down from a record-high 555 downgrades in the second quarter of 2008.
–Collateralized debt obligations (CDOs) were most negatively impacted by the September bankruptcy filing of Lehman Bros. Holdings Inc.
–Downgrades outnumbered upgrades by more than 4.7 to 1 in Europe, with CDOs accounting for the majority of the lowered ratings.
For details, see “Ratings Roundup: Third Quarter 2008 Global Structured Finance Trends.”
Technorati Tags: ABS, asset-backed-securities, CDO, CMBS, commercial mortgage-backed securities, commercial-real-estate, home sales, homebuilders, homebuilding, housing crisis, residential mortgage-backed securities, residential real estate, RMBS, structured-finance
Despite falling commercial property values across Europe, the number of loans in payment default remains extremely low across European commercial mortgage-backed securities (CMBS), according to Fitch Ratings. “This will inevitably rise in the coming year as economies slow and corporate insolvencies increase, but is still not expected to be the principal cause for concern for CMBS ratings across the continent,” Fitch says in a new report. “It is the risk that borrowers will be unable to make their balloon payments at loan maturity that represents the greater risk.”
The combination of declining property values with a restricted new lending market, means that borrowers facing loan maturity in the near future may well struggle to make expected balloon payments, at least in a timely manner.
“Declines in European commercial property values have been greatest in the UK, while other property markets that contribute significant collateral to European CMBS, including Germany and France, suffered relatively slight value declines. This reflects the strength of the preceding boom in capital values in the UK and is likely to bring greater downward rating pressure on UK CMBS than in other European countries. However, rating actions are likely to be restricted to the junior tranches, with most senior tranches still adequately covered.”
“The weakening performance of the UK property market will only fully translate into the performance of CMBS when properties have to be sold or refinanced to repay the loans,” says Euan Gatfield, Senior Director, in Fitch’s EMEA CMBS team. “This is unlikely to be the case for many loans in the near future as they are not scheduled to reach maturity and, unless tenant defaults result in reduced cash flow, interest service payments are likely to be made until then.”
The German property market appears to have shown relative resilience to the credit crunch. This, coupled with the fact that German banks continue to have access to wholesale funding via Pfandbrief issuance, allowing them to continue lending in significant volumes, is supporting property values. Fitch, however, cautions that although the multi-family housing market remains stable and is set to produce steady rental income in support of many loans, the costs required to effectively operate a portfolio of multi-family housing have increased in many cases, leaving several borrowers at increased risk of loan payment defaults.
French occupational markets remain close to equilibrium and so again overall valuation declines in France are expected to be relatively muted. Markets focused on the financial services sector are likely to be the first to suffer, including the La Defense district of Paris. However, new development has been muted across Paris, limiting the likely effects of declining demand.
For details see Fitch’s European Structured Finance CMBS Outlook - October 2008.
Technorati Tags: CMBS, commercial-real-estate, Europe, structured-finance
With the jury still out on the effectiveness of the myriad bank bailouts, topics related to the ongoing credit crisis and its fallout dominated the top posts this week. Visitors continued to come to Research Recap to keep up to date with ratings actions on financial companies in the new through our regular “Ratings Roundups.” Visitors were very interested in the OECD’s comparison of the differences in bank deposit insurance across countries. They might have taken comfort from Floyd Norris’s analysis in The New York Times showing that the impact of the banking crisis on the broader economy should be less in the US than in many other countries.
On a gloomier note, visitors were drawn to Moody’s warning that the credit crisis is likely to result in significant state and local budget cuts, including usually off-limits areas such K-12 education. Likewise there was strong interest in Fitch Ratings’ prediction of higher commercial real estate loan defaults.
Research Recap Quote of the Week:
We would be skeptical that a GM-Chrysler transaction could easily address our primary concern by resulting in a substantial increase of current liquidity for the parties involved.- S&P
Technorati Tags: (GM), banking-system, CMBS, commercial-real-estate, credit-crisis, municipal-bonds, state-and-local-government, structured-finance, Zeitgeist
Signs of deterioration in the commercial mortgage-backed securities sector were evident in 2007 and are likely to accelerate this year, Fitch Ratings says.
Though U.S. CMBS servicers resolved fewer loans in 2007, more of those loans incurred a loss and at a higher severity than in the prior year, according to Fitch’s U.S. CMBS Loss Study 2007.
Of the 319 loans, representing $1.8 billion in original balance, 151 loans (46%) incurred a loss, up from 40% in 2006. The average loss severity for loans resolved with a loss in 2007 increased to 41.5% from 31.8% in 2006. The average resolution time decreased to 22 months relative to 2006 of 31.8% and 28 months, respectively. The decline in resolution time and increase in loss severity in 2007 is the first time Fitch has observed a divergence of the two factors which are normally correlated.
As of year end 2007, special servicers had an inventory of 760 loans representing $4.7 billion in original principal balance as specially serviced. Fitch expects this number to increase in 2008 and exceed $6 billion as defaults rise and resolutions slow.
Office properties represented the largest share of workouts with loss for the first time in 2007 with 31.6% of resolutions with losses. Workouts of retail properties incurred the highest average loss at 48%, nearly double the average loss in 2006. Retail loss severities in 2008 are likely to be more in line with 2007 given declining economic conditions, reduced consumer spending, and increasing vacancies.
Fitch believes U.S. commercial real estate market fundamentals remain solid but expects defaults to increase through 2008. While defaults remain near historical lows, economic conditions in some markets and borrower-specific credit issues continue to slowly contribute to growing defaults.
The increased number of specially serviced assets and the more restrictive lending environment of 2008 will cause resolution times to increase.
Fitch also expects the turbulence of the capital markets in 2008 to translate into an increase in average loss severities for all assets. It will be harder for servicers to sell distressed assets as market turbulence causes many potential buyers to stand on the sidelines.
Technorati Tags: CMBS, commercial-real-estate, credit-crisis, structured-finance
The headline of last week’s Research Zeitgeist was ” The End of the World as we Know It.” There is indeed a palpable sense that financial markets will never be the same, but still no clear idea of what the new world will look like. This fact is illustrated by the difficulty “Washington” is having in reaching agreement on a plan to stabilize and unfreeze financial markets. It is clear that government will play a much more prominent and active role in the markets and the broader economy. It’s just a matter of the form and the duration of government involvement.
With at least one major financial institution going down every week, it’s no surprise that our daily “Ratings Roundup: feature has become very popular. Likewise, in the current gloomy atmosphere, it is to be expected that visitors are looking for signs of distress elsewhere in the financial system.
Of widespread interest this week were Oxford Analytica’s US Banking Crisis Turning Global, two reports from Moody’s, US Credit Card Performance Continues on Downward Trend and Investors in Corporate Bank Loans to see Higher Default Rates, and one from Standard & Poor’s, Commercial Real Estate is Second Shoe to Drop for US Banks.
Research Recap Quote of the Week:
In short, the financial crisis could lead to an overall systemic crisis through worsening local credit conditions, as well as through shrinking global real economy demand.- Oxford Analytica
Technorati Tags: ABS, banking-system, commercial-real-estate, corporate-debt, credit card debt, investment-banking, structured-finance, Zeitgeist
US Real Estate Investment Trusts seem to be faring quite well in the current credit crisis, a new report from Fitch Ratings indicates.
“Over the past several months, even as the capital markets have remained inaccessible to most U.S. equity REITs, sources of liquidity (cash, available credit facility borrowings, and retained cash flows from operating activities) less primary uses of liquidity (near- term debt maturities and future capital expenditure spending) have generated a liquidity surplus. Certain larger REITs continue to lead the industry, others have meaningfully improved their liquidity profiles, and some REITs continue to have liquidity shortfalls,” Fitch says. Large REITs that have improved their liquidity position include HCP, (NYSE: HCP); Apartment Investment and Management Co. (NYSE: AIV); and Sovran Self Storage (NYSE: SSS)”
Fitch continues to believe that, for most U.S. equity REITs, sources of liquidity exceed uses of liquidity in the near term.
“Many equity REITs are well positioned to address short-term cash requirements, as many have available committed amounts under their unsecured credit lines before violation of a financial covenant contained
either in the companies’ unsecured bond indentures or credit line agreements.”
Details are available in Liquidity of U.S. Equity REITs Remains Adequate Despite Market Inactivity.
Technorati Tags: (AIV), (SSS), commercial-real-estate, HCP, REIT, Sovran Self Storage, structured-finance, subprime
Early signs of expected retail property weakness caused US. CMBS delinquencies to tick up one basis point in August 2008 to 0.44% from 0.43%, according to the latest Fitch Ratings loan delinquency index.
The continued slow rise in delinquencies follows Fitch’s expectations that certain property types, led by retail, will experience higher delinquencies during the remainder of 2008.
While delinquent retail loans represent only 0.26% of all loans within the sector, retail delinquencies increased 29% over July’s total. Fitch also continues to monitor an additional 45 retail loans which are performing, but have been transferred to special servicing.
To date, retail delinquencies have been comprised primarily of smaller loans collateralized by strip centers or older power centers. The average loan size is approximately $4.9 million, and these properties are typically located in secondary or tertiary markets, or in markets facing difficult economic conditions. The largest geographic concentrations of retail delinquencies are found in Indiana, Michigan, and Texas, which represent 14.7%, 10.8%, and 9.6% of the delinquencies, respectively. Fitch notes that approximately 22.5% of all retail delinquencies are classified as non-performing matured loans.
The profile differs for retail loans which have been transferred to special servicing but remain current. The average loan size is larger at approximately $16.4 million, and the group includes several malls and larger retail portfolios consisting of anchored retail centers or single-tenant properties. Fitch expects smaller, less competitive regional malls to face additional store closures and declining sales. Recent back to school sales have been disappointing and upcoming holiday sales are expected to be weak for retailers this season.
Fitch anticipates that if sales results are significantly lower than expected, many operators will begin to close stores and/or scale back on new openings in first quarter-2009.
Multifamily remains the weakest property type in the index. However, the sector posted its second consecutive month of net decreases in delinquencies. The August decline can be attributed to the resolution of one large multifamily condominium loan totaling $128 million.
Delinquent multifamily loans currently represent 47.7% of all delinquencies within the index, though they make up less than 14% of all loans within the Fitch-rated universe. Of all delinquent multifamily loans, 29.0% are located in Texas, 14% in Florida, 11% in Michigan.
The seasoned delinquency index, which omits transactions with less than one year of seasoning, declined one basis point to end the month at 0.47%. Ten transactions totaling $26.0 billion became newly seasoned. Currently there is only one delinquent loan totaling $2.6 million in a newly seasoned transaction.
The loan delinquency index measures loans that are at least 60 days delinquent within the universe of all Fitch-rated transactions, which consists of 476 transactions totaling $559.6 billion.
Technorati Tags: CMBS, commercial-real-estate, credit-risk, Real-Estate, retail, subprime
Residential mortgages have gotten most of the attention during the current credit crisis, but a heavy concentration of commercial real estate (CRE) loans may be a better metric for gauging which banks are most at risk for failure in the coming months, according to Standard & Poor’s.
Eleven banks failed in the first half of 2008 and not surprisingly, S & P’s RatingsXpress Credit Research is predicting more this year and in 2009, due to continued deterioration in capital ratios, liquidity and in CRE, land development and construction loans.
Since construction loans are bullet loans with interest reserves accruing until a project is completed, we expect that problem construction loans will continue to rise in coming quarters. We also expect that loss severities among defaulted construction loans will be materially higher during this economic downturn compared with earlier downturns given sharp price declines among homes and condominium projects.
The rating agency also said most of the failures would be concentrated in small banks, especially those with a high degree of exposure to commercial real estate.
Among banks that have already failed this year, CRE loans accounted for an average 60 percent of loan portfolios. In contrast, in the three bank failures of 2007 more than 70 percent of the loan portfolios were concentrated in residential loans.
Banks with significant exposure to real estate in California, Nevada, Florida, Arizona, Michigan and Georgia are suffering the biggest downturns in credit quality, and S & P said it expects further home price declines and economic weakness to continue pressuring banks active in those markets.
S&P said while it’s hard to predict the number of bank failures, it does not believe failures will reach the levels seen during the savings and loan crisis of the late 1980s and early 1990s.
For details, see “U.S. Bank Failures Expected to Rise.”
Technorati Tags: Add new tag, Arizona real estate, bank credit, bank failures, bank ratings, banking, banking-system, California real estate, commercial-real-estate, construction loans, CRE, Credit Research, credit-crisis, Florida real estate, Georgia real estate, land development, loan losses, MHP, Michigan real estate, mortgage, Nevada real estate, subprime-mortgage
Recent actions by ratings agencies on financial companies in the news:
AIG (NYSE: AIG)
Fitch Revises Rating Watch on AIG to Evolving (Sep 17)
S&P: Ratings On 16 AIG Subsidiary Insurance-Supported Bonds Lowered And Placed On Watch Negative (Sep 16)
Fitch Places AIG South Africa and AIG Life South Africa on Watch Negative (Sep 16)
Fitch Downgrades AIG to ‘A’; Remains on Rating Watch Negative (Sep 15)
Lehman Brothers (NYSE: LEH)
S&P: Lehman Brothers Holdings Inc. Downgraded To ‘D’ (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 9 European CMBS Transactions (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 2 European ABS transactions (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 31 European RMBS Transaction (Sep 16)
Fitch Reviewing Ratings on Tender Option Bonds with Lehman Liquidity and Credit Enhancement (Sep 16)
Fitch Monitoring Potential Implications of Lehman Bankruptcy on Global Synthetic CDOs (Sep 16)
Moody’s Places Lehman Brothers 2007-LLF C5 Floating Commercial Mortgage Trust on Review for Downgrade (Sep 16)
Previous Ratings Roundup.
Technorati Tags: (AIG), (LEH), asset-backed-securities, CDO, CMBS, commercial-real-estate, credit-crisis, credit-rating-agencies, credit-ratings, credit-risk, Lehman-Brothers, RMBS, structured-finance
Standard and Poor’s is “very cautious” about the outlook for US regional banks, despite the fact that they have fared better than their larger counterparts so far.
“We believe that key factors in their outperformance at this stage are their lesser exposure to subprime consumer lending, and in some instances their more-contained exposure to high loan-to-value home equity lending, or purchased loan portfolios, ” S&P says in a new Industry Report Card. “In addition, this group has not had the sizable investment securities write-downs experienced by larger banks, although possible impairments in certain types of securities, such as pooled trust-preferred collateralized debt obligations (CDOs), are emerging, thus far in the form of unrealized losses. Still, compared to larger institutions, these banks benefit less from revenue diversification and may have less financial flexibility in the capital markets.”
Overall, we are very cautious about these banks’ overall credit quality through 2009, because of factors including the banks’ high exposure to commercial real estate (CRE) loans, particularly residential construction loans.
“Although they are rising, total CRE nonperforming assets (NPAs) are still not very high, but this loan category typically experiences deterioration at a later stage in economic downturns. Similar to the past few quarters, in the second quarter, many of the banks provisioned at multiples of net charge-offs to build a cushion against potential problem loans. We expect them to use these reserves as the credit environment continues to weaken into 2009. ”
The major CRE asset-quality issues so far continue to be concentrated in residential construction, with the greatest occurrence of problem projects in the formerly hot markets of Florida, California, and Arizona., S&P said. Other soft markets include areas of Ohio and Michigan, given the Midwest’s recessionary economies. “Besides our focus on home builder loan trends, we are also watching a broader-based market decline that may affect lending on retail, office, or hospitality properties.”
Technorati Tags: CDO, commercial-real-estate, regional-banks, structured-finance, subprime-mortgage