No Tsunami of Distress in CMBS Maturities

More than $192B of CMBS loans are set to mature in the U.S. in 2016 and 2017. Issued at the peak in 2006 and 2007, the wave of distress once anticipated from the “Wall of Maturities” will largely fail to appear as borrowers take early action to refinance deals, helped by a strong property market.

The anticipated tsunami of CMBS maturities that was expected to swamp commercial real estate in 2016 and 2017 has been trimmed down in size, thanks to early borrower action and a strong property market.

Loans backing CMBS issued in the boom years 2006 and 2007—which earned the moniker the “wall of maturities”—are coming due this year and next, raising concerns about whether borrowers can find new capital to recapitalize deals, and at rates low enough to avoid defaults or write-downs. However, the key message for 2016 is that the “wall” is getting smaller.

According to Susan Persin, senior director of research at Trepp, the volume of loans that need to be refinanced over the next two years fell 17 percent during 2015, to $192B from $232B.

Some of the loans have defeased, and some borrowers have “figured it out and settled things sooner while lending conditions and interest rates are favorable,” she says. “So it’s smaller, but it’s still a big dollar volume. And even though the totals have gone down from a year ago as loans have been resolved, the numbers are increasing in 2016 and 2017.”

Around $87B of CMBS loans will mature in 2016, with another $106B coming due in 2017. Persin looks at two primary indicators to assess whether there might be problems refinancing those loans, including the ability of borrowers to meet a debt service coverage ratio of 1.2X under prevailing financing conditions and likely near-term changes in financing costs. For the moment, neither indicator is flashing a warning sign.

“The news is relatively good,” Persin says.

Across most property types, if interest rates were to rise by 100 basis points (bp), just over 10 percent of loans could have difficulty refinancing. A 200bp rise would pose real questions for 20 percent of loans, Persin says, but “given what [Federal Reserve chair] Janet Yellen said when they increased rates, the likelihood of that happening seems low.”

Borrowers have also been helped by rising property prices in 2015, enabling many to refinance and meet loan-to-value (LTV) standards. In 2015, the LTV ratio for new CMBS conduit loans across all sectors was 63 percent, Persin says. While there will be some situations where borrowers have trouble meeting that standard, she adds, those loans will present an opportunity for mezzanine lenders to provide capital to fill the equity gap.

One lesson learned from the CMBS issuance of 2006 and 2007, though, is better due diligence, not least at the lender level and as the loan pools are assembled.

Fitch Ratings’ managing director, Stephanie Petosa, says the number of loan changes between the initial submission of a CMBS pool’s composition and the final roster has “increased materially.” In a sample of 28 Fitch-rated deals for the 12-month period ending June 30, 2015, approximately 1,000 loans were dropped—representing approximately 30 percent of the final transaction amount.

While it’s not unusual for loans to be dropped from a pool for sound reasons, Petosa says the rating agency “is concerned that the numerous loan drops could indicate a lack of lender due diligence prior to sending the initial loan information to rating agencies and/or B-piece buyers.”

Petosa says there’s “anecdotal talk that some originators may be using B-piece buyers and rating agencies as initial providers of credit feedback.” Fitch wants to push credit analysis to lenders, and as part of its originator reviews in 2016, the agency will be asking originators to describe the depth of their due diligence efforts for loans that appear on the initial roster, accompanied by a one-page asset summary.