Analysis by David Salz and Thomas P LaSalvia, PhD
Moody’s Analytics recently introduced a new module that identifies credit events in the CMBS universe based upon monthly reporting. In building this module, we wanted to highlight both negative and positive credit events. This week focuses on a positive credit event, a delinquency improvement, which occurs when a previously delinquent loan becomes current through either the execution of a modification agreement or a change in circumstances where the borrower is paying past due amounts. For the month of August, there are over $4 billion of loans that fall into this category. Taking a deeper dive into the top 15 loans, which represent over $2 billion in balance, we see that roughly two-thirds of that balance are loans on retail properties, a little less than 20% are hotels, and the remainder a mix of property types. Approximately one-third of the now current loans are categorized as paid up on their own and two thirds by modifications in various forms (e.g., payment forbearance or the ability to draw down reserves).
The numbers are a bit skewed by the size of the largest loan, Easton Town Center. This $700 million loan backed by a retail property was modified in July, and the modification was reported in August. Without this loan, the split between modifications and loan repayments would have been closer to 50/50; and specific to retail, three quarters would be repayments. We have noted in our review that the reporting on the improvement in delinquency can vary among the pieces of split loans. Some of this is explainable by the timing of reporting, but some is more random. Using the latest information reported on a split loan is a goal of our products.
Following this credit event informs us of the drivers in a restarting economy. In fact, several of the comments specifically highlighted re-openings and the removal of a request for relief. Are these “green shoots” for the economy? At a minimum, these are small positive steps in the right direction for CRE and are consistent with an increasing rate of on-time rent payments being made by retail tenants. Additionally, the continued use of modifications may represent a capital market, buoyed by the Federal Reserve, that is in a much better position now than during the 2008 crisis; a situation that will allow quality tenants, owners, investors, and servicers to find loan structures that work for all.
We will continue to follow these positive signs, paying attention to which are transitory, and which are lasting. In the meantime, as shown in the charts, loans in special service do continue to grow even as these modifications and improvements increase.
David Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, providing timely and insightful data analytics to CMBS and CRE professionals. Prior to his current role, he managed the ABS desk and worked on various CLO related projects.
Thomas P LaSalvia, PhD is a Senior Economist in the research and economics department at Moody’s Analytics REIS.