Fitch: Revolving Door Of Risker Assets Awaits U.S. CRE CDOs In 2007.

NEW YORK -- As issuance and deal size of U.S. commercial real estate (CRE) CDOs are set to reach new highs this year, more innovative structures and esoteric assets are being introduced into the sector that will likely only add to the growth of this sector, according to Fitch Ratings during their third annual CRE CDO seminar.

Addressing approximately 150 market participants, Managing Director and group head Jenny Story said that increased inclusion of commercial real estate loans (CRELs) has been the main driver in the growth of CRE CDOs, which could reach 50 transactions and $40 billion in new issuance by the end of 2006. What's more, the new issuance is hardly following a cookie cutter template as Director Jeffrey Berkes spoke of more innovative structures gaining in popularity such as CDS of CMBS and hybrid cash/synthetic CRE CDOs.

Director David Harrison also discussed the advent of more transitional 'spread-chaser' assets like condo, land and construction loans in CRE CDOs, which presents a legitimate concern for Fitch because they do not generate sustainable income. 'Many regional condo markets are tapped out, while others are starting to dry up, so understanding the risk inherent in this market is very important,' said Harrison. 'With respect to construction loans, not only are all third parties involved, but this opens up a whole other array of potential third party risks, as evidenced by what happened with Hurricane Katrina.'

The increased innovation being introduced to the CRE CDO sector, however, has yet to make a dent in its current rating performance, which Senior Director Karen Trebach deemed 'stellar'. The rating upgrades over the past twelve months were plentiful, but were primarily to static pools of CMBS bonds. Trebach also went on to say that rating upgrades should continue to vastly outweigh downgrades well into 2007, albeit at a slower pace, as upgrades of the underlying CMBS bonds are anticipated to slow. 'Few upgrades are anticipated on revolving commercial real estate loan deals as these deals tend to include more development loans which need time for business plans to be realized and will depend on continuing real estate fundamentals,' said Trebach.

Nonetheless, a thorough understanding of the increasingly nuanced CRE CDOs is a necessity. 'Fitch has expanded its CRE CDO group to 14 analysts since its launch earlier this year, each with vast knowledge of both CMBS and CDO markets that will be increasingly important as these structures become more complex,' said Story.

Also unveiled at Fitch's conference was CREL Surveyor, which is a management tool for CREL CDO issuers. For more information, see the recently released reports listed below, which are available on the Fitch Ratings web site at www.fitchratings.com:

-- 'Rating Methodology for U.S. Revolving Commercial Real Estate Loan CDOs';

-- 'Criteria for Analyzing Condominium Conversion Loans in U.S. Commercial Real Estate CDOs';

-- 'Criteria for Analyzing Land Loans in U.S. Commercial Real Estate CDOs';

-- 'U.S. CRE CDO Performance: 2006 Update'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.