'Floating-rate loans are typically structured with options to extend and Fitch anticipates borrowers will take advantage of these options. These extensions will allow borrowers additional time for the real estate capital markets to stabilize before a mandatory refinancing of their assets', said Managing Director Mary MacNeill. 'Although most borrowers are extending their loans, often times it is due to their current or extended rate being more attractive than getting new financing, as most loans are performing within their rated debt levels.'
Fitch reviewed the 54 extended loans to determine whether these loans would be likely to refinance in a fixed rate environment. Using the most recently reported servicer (Net Operating Income) NOI and applying a 7% refinance constant to it, only seven loans (of the 50 loans with reported financials) would not reach a debt service coverage ratio(DSCR) of 1.20 times (x) on the trust component.
Extension options are available on these loans due to the transitional nature of the properties. These options are generally available when certain conditions are met. Fitch reviewed these conditions for the loans with upcoming maturities and found that the criteria generally requires no event of default and/or a renewed interest rate cap agreement.
Of the 326 loans, 141 or $14 billion have maturity dates in 2008. 'Assuming all extension options are met and exercised, the greatest refinance risk shifts to 2011 when 50% of the outstanding Fitch rated floating-rate universe is expected to reach final maturity', said MacNeill. Seven loans that were originally scheduled to mature in 2006, totaling $449 million, and 51 loans originally scheduled to mature in 2007, totaling $4.2 billion, are in various stages of their extension options and are considered performing loans.
Maturity concentrations for $27 billion Fitch rated floating rate loans are as follows:
-2007 and prior: 17% by original maturity date;
-2008: 52% by original maturity date; 1% assuming all extensions;
-2009: 26% by original maturity date; 5% assuming all extensions;
-2010: 3% by original maturity date; 18% assuming all extensions;
-2011: 1% by original maturity date; 50% assuming all extensions;
-2012: 1% by original maturity date; 22% assuming all extensions.
-Beyond 2012: 4% assuming all extensions.
Fitch currently has classes in the deals with the three loans past maturity on Rating Watch Negative at least partially due to their maturity defaults. Each of the loans had at least one condition that was not met including: a maturity default resulting from the expired franchise agreement; failure to fund a debt service guarantee; and a breach of minimum DSCR criteria.
Only 6% of the Fitch-rated loans have no more extensions and are expected to mature in either 2008 or 2009. If the refinancing market does not recover, there is still the possibility that these loans will default, but minimal losses are expected to the trusts. If a loan matures but cannot extend, it is transferred to the special servicer. At that point, the special servicer has the flexibility to modify or restructure the loan, including extending it. Another mitigant to trust losses is related debt outside the transaction. All loans with final maturities in 2008 or 2009 have varying amounts of additional debt outside the trust which, in a liquidation, would absorb the first loss.
Fitch will continue to track the performance of the properties backing these floating rate transactions. Fitch's floating rate portfolio is only 5% of its total rated portfolio. If the loans do not stabilize to a point where they can be refinanced in a fixed rate environment, Fitch views the probability of default as higher.
