The large floating rate loans (LLFs) issued between 2005 and 2007 and tied to hotel loans have been the worst hit of all asset types, accounting for more than half of all losses, according to Fitch Ratings.
Of the $44.9bn in collateral that backed 509 pooled A-notes across 31 Fitch-rated LLF transactions, 25 loans had losses in excess of 1.5 percent of their loan balance. Of those 25 loans, hotel properties made up 54 percent of the $808mn in total losses, followed by retail backed properties, with 25 percent.
Hotels were hardest hit during the financial crisis, as tourism suffered and revenue-generating amenities such as casinos, spas and waterparks didn’t generate the expected level of income, Karen Trebach, senior director at Fitch Ratings, told Real Estate Capital.
“Some of the loans were made right after or during a repositioning or major renovation of the hotels,” she added. “Maybe they built more rooms or they were trying to get into a different segment of the market and it didn’t work out as they had hoped.”
Of the 31 Fitch-rated LLF transactions from 2005 and 2007, the agency still expects additional losses on 14 loans that remain, 10 of which are hotel loans.
However, the report stated that, although overall defaults were high for loans originated between 2005 and 2007, most went to special servicers and were later resolved.
“Only 17.5% of the defaulted loans experienced a loss (so far) as many loans that defaulted ended up paying in full,” the report said. But the severity for the ones that did incur losses was as high as 64 percent due to over-leverage, according to the report.
The cumulative default rate for conduit transactions originated between 2005 and 2007 stood at 21% as of year-end 2014.
“This number is likely to increase as additional loans will be unable to refinance at maturity,” Fitch Ratings said in the report. “When analysing these property types in newer transactions, Fitch remains conservative in its view of the long-term sustainability of cash flow.”