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Prospects Dim for Take-Out Financing on 2012 Loan Maturities

Happy New Year? Facing Tight Capital Markets, 2012 Will Usher In First Major Wave of Loan Maturities From 2007 Issued During a Frothy Period at the Peak of the Market
December 21, 2011
Next year could be pivotal for CMBS credit performance as a huge wave of loans is scheduled to mature in 2012. The timing is such that, given the current constrained capital markets, it could mean a huge wave of opportunities for distressed asset investors.

Over the next 12 months, CoStar is expecting $100 billion in loans pooled in commercial mortgage backed securities to mature. Of that amount, $70 billion is coming due for the first time, and another $30 billion in loans is delinquent but rolling on a monthly basis past their maturity date.

"With scheduled maturities of $100 billion in 2012 at a total average loan-to-value of 94.1%, we can expect more modification/liquidation decisions made by servicers," said Pooja Sharma, senior debt analyst for CoStar Group. "As the cycle progresses, we expect more of these loans to be resolved via liquidations or recapitalization modifications. So distress investors should continue to keep their eye on the ball; opportunities will increase."

Importantly, of the total maturing, $32.53 billion of the loans were underwritten in 2007, a year that marked the last peak of the commercial real estate cycle. Those loans back more than 2,600 properties.

Larry Kay, a Standard & Poor's credit analyst said: "2012 will also usher in the first major wave of maturities from the 2007 vintage, which were issued during a frothy period at the peak of the market."

"Although we expect upcoming maturities in a tight lending environment to put upward pressure on delinquencies, other factors are at work that could limit the increase," Kay said. "The modest improvement that we expect in property fundamentals and collateral performance should help to contain any significant increase in delinquencies."

However, prospects appear dimmer for borrowers trying to find take-out financing for these loans in 2012, according to bond rating agencies

"The retrenchment in the capital markets and among other lenders in the third quarter of 2011, which has continued into the current quarter, dims the refinancing prospects for loans maturing next year," Kay said.

Kay estimates that 50% to 60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, and retail loans are at the greatest risk.

Moody's also said that the balloon refinancing risk is material for 2006-2008 vintage loans.

"Although currently low interest rates serve as a mitigant, particularly for five-year maturity loans that originated at the peak, we remain concerned that ongoing credit market volatility may reduce liquidity," Moody's wrote in a 2012 CMBS outlook. "The ability of a loan to refinance depends in large part on its DSCR [debt service coverage ratios] based on rates prevailing at its maturity date."

Most of the loans maturing in the next two years currently have DSCRs of 1.40X or greater in both interest rate scenarios and appear well able to refinance.
However, Moody's wrote: "our outlook for 2016 and 2017, when the 10-year loans originated in the peak 2006 and 2007 vintages mature, is much more negative. Most of the loans maturing in 2017 currently have a DSCR of less than 1.40X, assuming a 7% interest rate, and a significant number of maturity defaults and loan extensions will occur in 2017."

Morningstar’s structured credit research group pointed out in a recent research note that many of the 2007 loans maturing in 2012 remain current, but have never met pro-forma underwritten expectations or have experienced significant performance declines. As such, they may not be able to secure adequate take-out financing.

A denial of borrower requests for loan modifications or debt restructuring by the special servicers, or a decision by borrowers to surrender the collateral, is a legitimate concern heading into 2012, Morningstar reported.

Based upon this concern, the delinquent unpaid balance for CMBS still has the potential to grow higher than 9% in 2012, Morningstar reported.

Vintage 2007 CMBS Loans Maturing in 2012

Loan Status Loan Balance
Del. More than 90 Days $496,611,751
Del. 30 Days or More$229,071,377
Del. 60 Days or More$50,917,817

Property Type Loan Balance
Retail $4,178,522,504

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