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Friday, 10 July 2009

One-Fifth of All CMBS Loans on Servicer Watchlists

Commercial Real Estate Direct Staff Report

One-fifth of all CMBS loans, by balance, are on master servicer watchlists, according to a tally by Bloomberg. And, not surprisingly, the bulk of those are from 2006 and 2007.

In total, 12,853 loans with a balance of $158.6 billion are on watchlists. They were placed there for various reasons, chief among them is that they failed certain objective financial tests, namely those for debt-service coverage levels.

Loans originated in 2006 and 2007 account for an overwhelming share - nearly 65 percent - of the volume on watchlists. By balance, $47.7 billion of 2006 loans and $55.3 billion of 2007 loans are on the watchlists.

During those years, lenders regularly underwrote mortgages based on collateral properties' projected property cash flows, as opposed to actual cash flows. And those projected cash flows in many, and perhaps most cases, have failed to materialize.

Indeed, by number of loans, 90 percent of those written in 2006 and 82 percent from 2007 were tagged because they failed to meet a minimum 1.1x (or 1.2x for healthcare and hotel loans) debt-service coverage threshold, or because their coverage levels have fallen since securitization. Most of the remaining loans from those years were placed on watchlists because the gross income from their collateral had fallen since securitization.

CMBS Loans on Watchlist


Balance ($mln)

% of Total on Watch



















Source: Bloomberg

Watchlists are designed to serve as an early-warning system for potential default. While an overwhelming majority of the loans on watchlists continue to make their regular principal and interest payments, they have characteristics that could place them at increased risk of eventual default.

And with current market conditions - weakening property fundamentals and continued tight credit - some loans could find it extremely challenging to improve their cash flow, or line up fresh tenants to get their watchlist tags removed.

Master servicers use a set of uniform industry standards to determine when to place loans on their watchlists. The standards have been codified into six main categories covering financial conditions, borrower issues, property condition issues, tenancy issues, maturity concerns and other issues that might make a loan a high risk.

A total of 6,673 loans are on watchlists for failing to maintain a minimum debt-service coverage level. Of those, 1,304 were originated in 2007 and 1,689 were originated in 2006, widely viewed as being the top of the market.

According to data compiled by Bloomberg, which earlier this year upgraded its CMBS analytics platform, a relatively small number of loans - 629 - are on watchlist because of a pending maturity. The bulk of those - 403 - were originated in 1999 and another 93 were originated in 2004.

The 1999 loans, in more normal circumstances, would be viewed as being less risky because they were written while interest rates were high and property values relatively low. What's more, most loans written in that era amortized, so their balances should have shrunk over the years. So the fact that loans from that year remain on watchlist because of a maturity is a clear sign of just how feeble credit markets remain.

Meanwhile, industry analysts have long warned of a small flood of five-year loans slated to mature in the coming years.

While those written in 2004 pre-date the sharp run-up in property values that started in 2005, many do not amortize. So not only might they face an inhospitable lending arena, their collateral values might now be lower than their balances.

Watchlist Code


# of Loans

% of Total
on Watch


<1.1x, 1.2x DSCR




Decline in DSCR




Occupancy decline




Drop in property income




Near-term lease maturity




Pending loan maturity



Source: Bloomberg

The biggest issues facing securitized mortgages, besides the struggle by 2006 and 2007 loans to pass their coverage tests, are occupancy issues. A total of 2,203 loans, or 17.1 percent of the amount on watchlists, have been placed there because of a decline in occupancy at their collateral. And 1,401 loans, or nearly 11 percent of those on watchlists, are there because of a decline in gross income at their collateral.

Comments? E-mail Orest Mandzy or call him at (267) 247-0112, Ext. 211.


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Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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