Now, It's Maturities on CMBS 2.0 Loans

Fitch anticipates refinancing challenges for underperforming CMBS loans.

N EW YORK CITY—For quite some time, the so-called wall of maturities—i.e. 10-year CMBS loans originated during the peak years of the previous cycle—has been a topic of discussion and speculation about the market’s ability to refinance the debt. Now, even as billions in 2006-vintage CMBS come due, there’s also the matter of five-year maturities on securitizations from 2011. “Financial markets are off to a volatile start in 2016, the effects of which have resonated into the CMBS industry,” Fitch Ratings says in a new report. “Interest rate and bond spread uncertainty as well as new regulatory requirements will continue to pressure liquidity.” The Wall Street Journal reported earlier this month that risk premiums on some tranches of CMBS have jumped 2.75 percentage points since Jan. 1. Accordingly, the ratings agency is keeping a close eye on this year’s crop of five-year maturities. “Loans which have been underperforming will have a difficult time refinancing in a market facing numerous challenges,” according to Fitch. That being said, the wall of five-year maturities in ’16 is considerably smaller than its 10-year counterpart. US CMBS issuance in ’11 totaled slightly more than $32 billion, compared to approximately $202 billion in ’06. Fitch says 11% of the ’11-vintage conduit loans it has rated will mature this year, and of that total, 12% have already been defeased and two loans are currently in special servicing. Both loans in special servicing are backed by office properties. One is secured by an office property in Washington, DC, and was just transferred to special servicing last month due to imminent ahead of its April maturity. The other loan, on an office property located in North Richland Hills, TX, became REO in July 2013; it was to have matured in March. Eight loans, comprising 4.5% of the Fitch-rated total of five-year maturities, have debt service coverage ratios below 1.25x. One is secured by a hotel property, two by office properties, three by retail properties and two by manufactured housing community properties. A common element in five of these loans is the state of Texas. Along with the three retail securitizations in the Dallas metropolitan area and in San Antonio, both office loans with low DSCRs are in cities that Fitch is watching: Dallas and Houston. In both cases, the extra scrutiny is due to “significant amounts of anticipated new construction,” while Houston also bears studying due to its oil dependency. However, Fitch notes that none of the five-year loans maturing this year face exposure to the energy markets in North and South Dakota, which have been hard-pressed in recent months. Additionally, exposure to the Houston oil market is “relatively limited,” Fitch says, and the largest of the five-year maturities in that city, the $155.3-million loan on Three Allen Center, is backed by an office property that has performed well. For the non-defeased and non-specially serviced loans among this year’s class of five-year maturities, performance continues to remain strong with over 66% of them by balance having a a DSCR on a net cash flow basis greater than 1.45x. “This should provide strong prospects for refinancing,” according to Fitch.