Fitch: U.S. CREL CDO Delinquencies Exceed 10%.

NEW YORK -- New matured balloons and past due loans secured by interests in non-traditional assets propelled U.S. CREL CDO delinquencies past 10% for the first time, according to the latest index results from Fitch Ratings.

The Fitch CREL CDO Delinquency Index for October increased to 10.8% from 8.7% last month, with non-traditional property types now representing 44% of all delinquencies, a disproportionate amount compared to the percent of all collateral in CREL CDOs. Non-traditional property types, which include loans secured by interests in land, condominium conversions and construction projects, comprise only 13% of the collateral in Fitch rated CREL CDOs.

'About a third of the new delinquencies are large matured balloon loans that may be ultimately extended,' said Senior Director Karen Trebach. 'While these loans may be returned to performing status sometime in the future, Fitch will consider the merits of loan modifications and extensions in its surveillance analysis.'

The largest new delinquency is a $110 million A-note secured by a portfolio of eight multifamily properties located in five states. An affiliate of the asset manager assumed the loan and subsequently extended it for a year at a below market rate, which was 200 basis points lower than the coupon at origination. Without this spread reduction, the cash flow would not have been sufficient to cover debt service. Upon its newly extended maturity date, this loan defaulted.

New delinquencies secured by non-traditional property types this past month included two loans secured by interests in land and two secured by construction projects. Land loans currently comprise the largest component of the index with 32% of all delinquent loans. Approximately 40% of all land loans in the Fitch rated CREL CDO universe are now delinquent with increased delinquencies expected. Other non-traditional asset types also have high overall delinquency rates with condominium conversions at 23% and construction loans at 29%. Fitch assumes all loans secured by interests in land and other non-income producing assets experience a term default as part of its rating reviews.

Realized losses continue to accumulate with $27 million reported this past month, including a $9.4 million mezzanine loan interest on land that was completely foreclosed out. To date, total realized losses to CREL CDOs are approximately 3.4% of the fully-ramped collateral balance.

34 of the 35 Fitch rated CREL CDOS reported delinquencies in October with individual rates ranging from 1.4% to 38.6%. Additionally, a total of 13 Fitch rated CREL CDOs were failing at least one overcollateralization (OC) test. While two new CDOs are failing at least one test, a CDO that was previously failing a test by only 0.08% cured the failure by building par through the purchase of three discounted assets. 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.

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 and assets that are 60 days or longer delinquent, matured balloon loans, and the current month's repurchased assets.

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