What does the valuation decrease mean for future losses from the CMBS loan


229 West 43rd Street in New York and Two Westlake Park in Texas.  New York and Texas are the states with the largest exposure to impaired loans.  (Photos via iStock; Google Maps; JLL)

229 West 43rd Street in New York and Two Westlake Park in Texas. New York and Texas are the states with the largest exposure to impaired loans. (Photos via iStock; Google Maps; JLL)

As crime rates for commercial mortgage-backed securities, they have settled to a new normal after the initial pandemic chaos, with further market metrics indicating further struggles.

One such data point is the impairment amounts that come into play when a CMBS loan encounters a trigger event, such as a serious delinquency or insolvency. The calculation of an ARA loan is determined not only by the estimated value of the property, but also by factors such as the outstanding balance of the loan principal and reserve funds.

At the end of 2019, there were 111 outstanding CMBS loans for ABS loans, but by November 2020 this figure had risen to 409, according to new message from Kroll Bond Rating Agency.

“Given the prevailing economic environment, the lagged effect of commercial real estate performance on the general economy, and because 90 percent of delinquent and specially serviced loans do not have ARA, we expect the absolute dollar volume of ARA to continue to grow until 2021,” Kroll analysts wrote.

The biggest significant drop in ratings is for Kushner Companies real estate: a 250,000-square-foot retail apartment at 229 West 43rd Street in Times Square, which is from before the pandemic and saw him value reduced from $ 470 million to $ 92.5 million in August.

Retail in general was one of the hardest hit sectors, with 156 outstanding loans burdened with a downgrade of a total of $ 1.7 billion. As the table below shows, the accommodation sector has a larger number of loans facing reductions, although its total amount of reductions is significantly lower.

A downgrade can have an impact on Kroll bondholders in Kroll in many ways. They lead to a reduction in the amount of principal and interest payments that employees are required to deposit, resulting in downtime for subordinate certificate holders. It can also shift control of a CMBS transaction to a higher class.

After New York, according to the report, Texas is the country with the largest exposure to lower-rated loans. The reductions are dominated by a pair of office buildings in Houston’s energy corridor, which is suffering from a downturn in the oil industry and new supplies in the area. Two Westlake Park saw its estimate fall from 124 million to 24 million, while Three Westlake Park fell from 121 to 38 million, according to Trepp.

According to Kroll’s analysis, about half of all rating reductions made in the last two years appeared to be “automatic”, meaning that no updated rating was received within the 30-60 day timeframe, so an ARA equal to a quarter of the outstanding loan principal balance was used by default.

Historical analysis found that a downgrade was a good predictor of potential losses. Of the 59 loans provided between 2014 and 2019, which had non-automatic ARAs, 44 ended with realized losses that were greater than their original reduction amounts.

Still, “[w]while the historical perspective may provide some guidance, in these uncertain times, past results may not predict future losses, ”analysts note.

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