Cautious Optimism About CMBS Special Servicing

Even though less securitized commercial mortgage loan deals moved into special servicing in 2012 analysts are cautiously optimistic for 2013.

And the prolonged and inconclusive fiscal cliff debate is one of the factors bound to affect the CMBS market performance this year.

In the first days of the year as an incomplete fiscal cliff deal was passed by Congress, avoiding a worst case scenario, Barclays analysts wrote in their weekly report, “It leaves the door open for further legislative battles in a few months,” and uncertainty that will result in some spread volatility.

Consequently, while CMBS spreads tightened sharply during the first days of January, analysts are not certain what the case may be in the following months.

The CMBS market reacted to the last-minute deal reached by Congress with “sharply tighter” spreads among 2007 vintage AMs, which compressed 20 bps, and AJs, where prices ticked up anywhere from 2-3 points, analysts said. Also in January 2012 vintage BBBs were traded at about 30 bps tighter than last year.

They warn about further legislative debates in February and March on a number of issues, including the sequestration trigger, the extension of the debt limit and the continuing resolution to fund the government. “Given the absence of spending cuts or entitlement reform in the current deal, we expect these issues to come into more focus in these next rounds of negotiations.”

Upcoming legislative wars have the potential to cause “bouts of spread volatility around then,” they wrote.

The most recent Fitch Ratings CMBS market overview shows some persisting improvements in 2012.
As of yearend 2012 up to $49.3 billion in deals monitored by Fitch Ratings currently are under the scrutiny of a special servicer.

These loans represent 12.3% of all CMBS deals—marking the second year-over-year improvement in the rate of new transfers into special servicing since 2010.

Fitch data show in 2012 $16.8 billion transferred into the special servicer status down from $20 billion in 2011 and $26 billion in 2010.

In 2012 a total of 156 loans of over $20 million transferred from the master servicer to the special servicer, compared to 210 in 2011.

Fitch’s assessments of the ongoing appointments of replacement special servicers also show “an increase in servicing transfers due to shifting control rights.”

Going forward, the ratings agency said, these types of servicing transfers are expected to become more popular once “realized losses are incurred” and the actual change of hands occurs.

In its “CMBS Outlook 2013: It’s All Relative” report, Barclays’ analysts “expect the positive momentum from 2012 to continue to push spreads gradually tighter” this year and remain positive on most higher-quality CMBS bonds.

But advised caution “on the higher-beta names in the 07 AJ/mezz space,” arguing that such bonds remain exposed to maturity risk over time and are also affected by tenant rollover in office buildings, “which should continue to push large loans into special servicing.” Plus, they expect “trend of higher severities on distressed retail assets” to continue in 2013.

Credit data show the 60-plus-day delinquency rates of securitized commercial mortgage loans fell by 10 basis points in December, compared to the previous month.

Also, as more five-year term 2007 vintages continue to mature, related delinquencies continue to decline.

At the same time the delinquency rate for underperforming 2006 vintages increased 10 bps.
Overall, however, the percentage of loans in special servicing declined 30 bps and is down 50 bps compared to the past three months.

Analysts are cautiously optimistic. “The percentage may increase next month, with several large loans, including the $250 million US Bank Tower, having been reported moving into special servicing by Fitch Ratings,” they wrote.