While the CREL DI is continuing a gradual upward ascent - up from last month's rate of 1.46% - it is being tempered by the asset managers' flexibility to change the terms of the underlying assets through continued extensions and to repurchase credit impaired loans. While the volume of extensions has grown, repurchases as a percent of total delinquencies have declined in recent months. As such, the 57 basis point (bp) increase of new additions to the CREL DI is partially offset by the extension of one matured balloon loan (nine bps) which showed as delinquent last month and the exclusion of the three repurchased assets (15 bps) which were included in last month's index.
The increase in the CREL DI could also be tempered by the imminent extension of one of the newly added loans to the Index. Without this loan included, the CREL DI would fall to 1.47%, which is only one basis point higher than last month's rate. This loan is classified as a matured balloon whole loan (32 bps). Per the asset manager, the borrower requested a one year extension for this still stabilizing office property. The extension is permitted in the loan documents, and is currently being processed.
The number of loans extended this month totals 34 loans (0.3% by number of loans in the CREL CDO universe); roughly two-thirds were extensions that were contemplated in the original loan documents. Extensions are being exercised on matured balloon loans secured by transitional assets as business plans are either taking longer to actualize or are stalled. Further, favorable refinance opportunities remain scarce for all borrowers under current market conditions. While extensions have allowed delinquencies to remain relatively low, they are potentially deferring possible losses on overleveraged assets.
Two loans (15 bps) were repurchased this month. The first loan is secured by a multifamily property. The asset manager repurchased this asset as it believed a default was imminent. The loan's interest-only period was scheduled to expire and property cash flow was not sufficient to cover the soon to be higher payment. The other repurchased loan is a condominium conversion. Foreclosure proceedings have been initiated. Comparable units were selling at prices well below the required release prices for the subject property; the lender and borrower were not able to negotiate an acceptable lower amount.
The CREL DI includes loans that are 60 days or longer delinquent, matured balloon loans, and the current month's repurchased assets.
