Defeasance activity for US CMBS remained strong last quarter, though changing interest rates or liquidity could derail this two-year trend, Fitch Ratings said in a new report.
Newly defeased Fitch-rated US CMBS loans in the fourth quarter loans totaled $3.6 billion last year, for a $14.2 billion year-end total compared to nearly $20 billion in 2014.
Fitch Ratings expects defeasance volume to remain strong the first quarter of this year but said overall defeasance volume this year is likely to decline from prior years due to the possibility of further interest rate declines, the impacts of new regulatory requirements and the health of the overall US economy.
The largest share of defeasances last quarter, or 40 percent, were from 2007-vintage loans, totaling $1.5 billion. Some of the largest loans that defeased were a $350 million loan on an office property at 590 Madison Avenue and a $170 million loan on the Tower 45 offices in New York City, and a $233 million loan on Galleria Towers in Texas.
Fewer big loans defeased last quarter compared to the same quarter 2014. In the fourth quarter 2015, only four loans greater than $100 million defeased, compared to fourth quarter 2014 when 14 loans greater than $100 million defeased.
Defeasance allows a lender to reduce the fees required when a borrower decides to prepay, which can result in lower yields, particularly if the loan is bundled into a securitized loan. It’s an option offered during the negotiation of a commercial real estate loan which allows the borrower to exchanges another cash flowing asset for the original collateral for the loa instead of paying cash.
The new collateral typically comes in the form of Treasury securities and is usually much less risky than the original assets.