Three separate businesses each had a series of nonperforming loans that are classified as specially serviced assets recently downgraded by Fitch Ratings because future losses are expected on these loans.
First, the New York-based rating agency downgraded four classes of distressed loans in the commercial mortgage pass-through certificates series 2005-PWR8 at Bear Stearns Commercial Mortgage Securities Trust. However, Fitch also affirmed 14 classes of loans in this series.
According to Fitch, the downgrade occurred because of the increased certainty of expected losses on the specially serviced assets, while the affirmations reflect the agency’s stable-to-improved overall loss expectations on the remaining pool of loans.
Expected losses on the original pool balance totaled 6.9%, while Fitch modeled losses of 6.1% for the remaining pool of loans. Fitch designated 49 loans (22.6%) as “loans of concern”, which includes nine specially serviced assets.
As of the April 2012 distribution date, the pool’s aggregate principal balance was reduced by 14.5% to $1.51 billion from $1.77 billion at issuance.
The largest contributor to expected losses for this series of loans is the real estate owned Union Centre Pavilion, a 146,000 square-foot retail center in Cincinnati. This asset transferred to special servicing in February 2009 for imminent default and became REO in January 2012. Based on recent valuations, Fitch expects significant losses upon disposition.
The next largest contributor to expected losses for this pool of loans is the REO asset Roseville Corporate Center. This is a 230,000 square-foot office property located between Minneapolis and St. Paul that was foreclosed upon in December 2011.
A second business that saw Fitch downgrade seven classes of nonperforming loans was Credit Suisse First Boston Mortgage Securities.
Similar to Bear Stearns, Fitch anticipated losses in Credit Suisse’s pool of loans that are specially serviced assets. For the Credit Suisse series of loans classified as 2003-C3, Fitch modeled losses at 4.8% of the original pool based on the agency’s valuation of performing and specially serviced loans, in which 23 loans (16.6% of the pool) were considered as loans of concern.
The aggregate principal balance at the end of April’s distribution date was decreased by 37.6% to nearly $1.1 billion, compared to $1.7 billion at issuance. In addition, 29 loans have been fully defeased, Fitch said.
A loan secured by a 216,416 square-foot office complex that saw its occupancy decline to 61%, therefore resulting in low debt, was the main contributor for the expected losses in this series. Meanwhile, rollover risk remains high through 2013 for this asset as leases are set to expire on approximately 35% of the combined rentable area, including the largest tenant.
The second largest contributor to expected losses for Credit Suisse’s serious of nonperforming loans is a specially serviced asset secured by a 708 unit multifamily property in Houston. The loan was transferred to special servicing in January 2010 due to imminent payment default and the property was foreclosed on by the trust in July 2011.
Another specially serviced asset secured by an 81,000 square-foot office building in Exton, Pa. was a main contributor for the downfall of the 2003-C3 loan pool. This loan transferred to special servicing in December 2009 due to payment default. The servicer reported occupancy was 23% as of April 2012. The loan was foreclosed on in September 2011 and CBRE is currently managing the property.
Lastly, Fitch also downgraded the long- and short-term issuer default ratings of First Interstate Bancsystem and its lead bank subsidiary, First Interstate Bank to “BBB-” from “BBB” and to “F3” from “F2,” respectively.
A BBB long-term rating indicates that expectations of default risk are currently low. Fitch said this rating means that the capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
For short-term credit ratings, Fitch said an “F3” is a fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments
Meanwhile, the overall rating outlook for First Interstate was revised to stable from negative.
The downgrade reflects Fitch’s concerns regarding the bank’s high levels of nonperforming assets and concentrations in riskier asset classes, specifically construction and land development loans which currently represent roughly 9% of the total portfolio.
Fitch revised the bank’s outlook to negative a year ago, indicating that a downgrade could occur if asset quality did not improve. While nonperforming assets have declined from their peak in the second quarter of 2011, Fitch notes that they are still elevated, particularly the amount of construction and land development loans that remains on the bank’s books.
“Significant amounts of this troubled asset class have already been charged off, transferred to other real estate owned or disposed of. However, the bank maintains a $400 million portfolio with 37% of this balance being either nonperforming,” Fitch said in a press release. “This portfolio represents nearly 75% of the company’s common equity and is much larger than the company’s investment grade peers.”
