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Nearly 500 Loans Granted Coronavirus Relief in Fitch-Rated CMBS

September 18, 2020, 09:15 AM
Filed Under: Industry News

Since the start of the pandemic, 488 loans totaling over $13 billion, have been granted coronavirus debt relief through the end of August 2020; this represents approximately 2% of the Fitch-rated CMBS universe by loan count.

Debt relief measures have differed greatly across special servicers, property and deal types, with no "one-size-fits-all" approach. In addition, there hasn't been a consistent approach among servicers to address relief requests for CMBS loans due to differences in loan servicing agreements and controlling class holder preferences. In many cases, the Pooling and Servicing Agreement allows the master servicer, or with the permission of the special servicer, to grant short-term forbearance. In other cases, master servicers have preferred to transfer delinquent or pending delinquent loans into special servicing.

The most common forms of debt relief observed among loans in Fitch-rated transactions include:

  • Reallocation of existing reserves for debt service payments, mainly in the hotel sector and for larger retail portfolios;
  • Payment forbearance, which includes the deferral of debt service payments and/or reserve payments (ranging from three to 12 months);
  • Conversion of amortizing principal and interest payments to short-term IO payments, mostly in the Canadian space;
  • Maturity date extensions, primarily for loans with upcoming maturities that were performing well pre-pandemic;
  • Amendments to the waterfall structure for loans in cash management arrangements.

Geographically, the New York, Houston, Chicago, Los Angeles and Dallas metro areas have seen the largest concentrations in debt relief.

Fitch's overall U.S. CMBS loan delinquency rate was 4.76% as of August 2020, down 22 bps from July; if the loans granted debt relief were assumed to be delinquent, the rate would increase to 7.1%, which would be closer in-line with Fitch's projection of between 8.25% and 8.75% by the end of 3Q20.

The various forms of debt relief provided by special servicers have been effective in providing short-term relief and mitigating a sharp rise in delinquencies; however, any long-term success is just coming to light. Borrowers which had been granted temporary payment forbearances in April and May are approaching the end of their relief periods and will now be returning to regular payment schedules, plus catch-up payments. The economic recovery of the underlying property and the strength of the loan sponsor will determine if these loans begin performing or return to special servicing. Fitch anticipates transfers to special servicing will increase as forbearance periods on loans come to an end, particularly for retail assets, as tenants and landlords continue to struggle from the impact of the coronavirus and face a long recovery. Fitch also expects there will be an increase in maturity extensions given limited refinancing options for retail and hotel assets.

Some of the borrowers granted initial forbearance in 2Q20, especially those with hotel and retail properties, have begun to request a second round of debt relief from servicers. However, this is not expected to reach similar levels to 2Q20. Initial responses from special servicers indicate more stringent parameters on borrowers to obtain additional debt relief, some in the form of additional equity contributions or recourse. Loans that cannot perform post-relief will return to special servicing and servicers will be looking closely at property performance and sponsorship support when considering any additional relief.

Special servicers continue to work with borrowers to cure loan defaults; however, some borrowers may not wish to retain properties. Temporary foreclosure moratoriums, which have been implemented in approximately 30 states, add systematic uncertainty to workouts in the near term.

The majority of the relief requested and granted to date have been to borrowers of hotel and retail loans. Special servicers have begun to see signs of improved hotel performance in some markets; however, retail, particularly regional malls, continue to struggle and are subject to material value declines due to the acceleration of pre-pandemic performance concerns, tenant bankruptcies and store closures. Relative to hotels, debt relief granted in the retail space has been much lower as special servicers have adopted a case-by-case approach given the need to understand the cash flow and tenancy mix and which borrowers are able support the property. Differing from hotel loans, which may be able to reallocate reserves to pay debt service, retail loans typically do not have significant reserves in-place. It may not be prudent to use any existing tenant improvement or leasing commission reserves for a retail property due to uncertainty over the future needs for the property.

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