Via Financial Times

Investors in US commercial mortgage-backed securities are bracing themselves for losses as the coronavirus pandemic forces owners of malls, hotels, office towers and other properties to skip payments.

More than $45bn of mortgage loans bundled into US CMBS are overdue and were in so-called grace periods in April, S&P Global said on Tuesday.

Analysts with S&P, the country’s largest credit rating agency, forecast that 10 per cent of mortgages in US CMBS deals could fall into delinquency in May if those in their grace period continue to go unpaid. In April that share was less than 2 per cent.

“The measures adopted to contain Covid-19 have pushed the global economy into recession and could cause a surge of defaults,” said Ambika Garg and Tamara Hoffman, analysts at S&P.

Details on loan payments that have fallen behind, including those that are less than one month past due, are now being closely followed by investors looking to understand the damage inflicted by the closures and shelter-in-place orders that have been imposed as US officials attempted to curtail the spread of the virus.

The grace periods cover mortgages that are less than 30 days late as well as payments that have not yet been collected by the time the mortgage servicer issues its monthly report to investors.

Line chart of Percentage of loans in commercial mortgage-backed securities that are past due (%) showing Investors gird for a surge of delinquencies

Since March, hotel bookings have collapsed while restaurants and retailers in suburban strip malls and shopping centres have closed their doors. Only in recent days have some companies begun to reopen on a reduced basis. Many businesses have moved to conserve cash and have refused to pay rent.

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“We have seen a significant ramp-up in loans not only in special servicing but in a grace period over a short period of time,” said Sagar Parikh, a securitised products trader at asset manager TCW. “It’s our anticipation that the numbers will pick up [in] May based on what we saw from . . . the forbearance requests.”

S&P said on Tuesday that 91 loans worth $2bn were newly delinquent, with past-due mortgages on hotels accounting for nearly half of the figure. The rating agency estimated those loans lifted the overall delinquencies in CMBS deals to $9.8bn. 

Lower-rated tranches of CMBS have tumbled in value. The securities, which are sliced to give investors varying degrees of exposure to the potential default on the underlying mortgages, have sunk since late February when fears surrounding coronavirus first hit US financial markets.

A report distributed on Tuesday to investors in a CMBS structured by Citigroup in 2012 underscored the rapid spread of delinquencies. Figures showed that six of the 46 loans underpinning the deal were behind payment in early May, up from three in the previous month.