CRE FinanCE W Rld

Benchmarking CMBS Maturity Performance and Loss Severities with an Eye Toward 2017
For loans that experienced a term default in 2014 through thirdquarter
2016, the percentage of those experiencing a greater than
2% loss upon liquidation has fallen from 65% in 2014 to 49% in
2015 and 36% in 2016 through the third quarter. We attribute this
mainly to rising property values (although the pace of appreciation
has slowed in 2016), and generally improving commercial real
estate fundamentals, which should leave investors less inclined
to default in marginal stress situations. Also, average loss severity
across all liquidations declined from 41% in 2014 to 34% in
both 2015 and 2016 through September. Not surprisingly, loans
with below an 8% DY or no reported DY information tended to
underperform. In addition, hotel and retail properties, on average,
reported relatively higher loss severities upon liquidation.
Table 4
Overall Maturity Default Loss Severity* Summary, 2014-Third-Quarter 2016
% liquidated Average LS (%) % liquidated with >2% LS
Average LS among those
with >2% loss (%)
Debt yield range 2014 2015 2016 Q3 2014 2015 2016 Q3 2014 2015 2016 Q3 2014 2015 2016 Q3
No debt yield 100 100 83 29 38 24 64 79 69 38 58 33
8% < 74 67 57 8 10 17 16 18 19 41 37 44
8%-10% 76 70 41 6 7 5 10 17 9 33 24 22
10%-12% 90 66 40 17 8 14 30 16 14 37 32 42
> 12% 85 79 48 3 3 9 11 6 10 29 36 38
Total 80 70 49 11 9 13 20 17 15 37 36 37
*We’re measuring LS as a percentage of original balance. LS—Loss severity. H1—First half.
On the whole, loans classified as maturity defaults tended to liquidate
with lower loss severities versus term defaults. In fact, many
maturity defaults that were resolved via liquidation in the recent
past experienced little or no loss. This suggests that many maturity
defaults are simple refinancing issues that when resolved — in what
has been a generally favorable refinancing environment due to low
interest rates and rising property values — result in limited severities.
Term Defaults Have Longer Resolution Times Than
Maturity Defaults
Table 5
Overall Average Resolution Times, 2014-2016 Q3 (Months)
Term defaults
Maturity defaults
Following the pattern in loss severities, resolution times are much
longer for loans with DY below 8%, or for the loans where we
have no information reported. Our default studies have shown that
longer resolution times are typically correlated with higher loss
severities. In addition, loans that experience term defaults have
much longer average resolution times versus maturity defaults.
Further investigating maturity defaults, there is a substantial
difference in resolution times for loans that have experienced
a greater than 2% loss.
The authors would like to thank Kirankumar Jathar for his contributions
to this report.
Debt yield range LS > 2% Overall LS > 2% Overall
No debt yield 49 48 44 40
8% < 39 38 31 20
8%-10% 30 29 25 12
10%-12% 23 23 22 11
> 12% 26 26 22 10
Total 38 36 29 15
LS—Loss severity.
CRE Finance World Winter 2017
40