Page 27

CRE Finance World, Winter 2013

Legacy CMBS Credit Outlook for 2013: Don’t Get Caught Swimming Naked Within CMBS, we see potential tailwinds likely to bring fundamental realized losses. If we use recent appraisals and appraisal reduction credit work to the forefront and reward effective security selection. amounts (ARA) as a rough proxy for losses on these loans, this We focus on four potential risks: suggests $1.7 billion3 of realized losses by the end of 2013. We see upside to these loss estimates, as from our experience the longer 1) A “Kick the Can” Speedbump the asset stays in REO, the greater the chance of a higher than First, the “kick the can” strategy employed by most special servicers expected loss severity given unexpected advances and expenses. is bumping up against an obstacle. Loan liquidations and realized losses have remained relatively low in CMBS, certainly below the REO sales are not the only disposition strategies employed by pace many had expected back in 2009 and 2010 at the depths of special servicers; they may also pursue note sales, discounted the financial crisis. Realized losses for 2005+ vintage CMBS deals payoffs, principal writedowns/modifications, etc. If we conservatively stood at only $13.9 billion, or 2.8% of original deal balance, as of apply weights to amount of liquidated loans across REO, matured November 2012. YTD through October 2012 period, we had seen non-performing, foreclosure, and 90+ day delinquent buckets and only $4.6 billion of realized losses across $9.2 billion of liquidated use ARA’s as rough proxy for losses, we estimate over $6.5 billion loans by original balance. This is only up slightly from 2011, despite of realized losses by the end of 2013, or nearly 1.7% of current a continued rise in delinquencies. During this period, REO assets balance. This would be a sharp rise versus 2012, where we have increased by $4 billion, to $14.4 billion. seen $4.6 billion of loss liquidations through the end of October. These estimates ignore any liquidated loans with small losses Pickup in REO sales (<3%) associated with special servicer fees. Time is starting to run out on some of these REO assets. Special 2) There Goes My Credit Support servicers are given wide latitude to resolve REO inventory, and generally have 3 years to sell REO assets before facing a REMIC The rise in liquidations will lead to lower credit support and less tax issue deadline2. The average age of REO assets in 2005+ “margin of safety” for legacy credit investors. Also, in 2013, investors legacy deals is 14 months; however, this masks a wide distribution will not have the same magnitude of benefit from trust deleveraging across servicers. CWCapital, the special servicer with the largest from maturing loan payoffs as in 2012. At the beginning of 2012, REO pipeline for 2005+ legacy deals, has an average age of REO 2005+ conduit loans had over $30bn on loans scheduled to assets of 17 months; Helios, a smaller special servicer, has an mature; according to Credit Suisse, 68% has paid off through average age of 18 months. We find that $2.9 billion of REO assets October 2012, exceeding expectations. In 2013, only $7.4 billion will reach their 3-year hold limit by the end of 2013, and an additional of scheduled maturities needs to find refinancing. In 2013, par $5.2 billion by the end of 2014. payoffs on maturing loans will not be able to offset realized losses. Combined, we suspect this will lead to average drops in AJ credit Figure 2 support of ~150bp, with considerable dispersion across deals — 2005+ Vintage Material Delinquency Profile from a 0% impact to nearly 12%. Figure 3 2005+ Vintage Scheduled Maturities Source: Bloomberg. Data as of November 16, 2012 We believe the majority of the assets hitting their 3-year REO limit by the end of 2013 will be liquidated next year, leading to a pickup in Source: Bloomberg. Data as of November 16, 2012. A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 25


CRE Finance World, Winter 2013
To see the actual publication please follow the link above