CRE CLO Distress Rate Reaches Record High of 13.2%
In our final report for 2024, the CRED iQ research team focused on commercial real estate collateralized loan obligation distress to explore how this marketplace has evolved since our report in November. After giving back 97 basis points in our November report, the December CRED iQ distress report reversed that progress by reaching a record high of 13.23 percent.
The CRED iQ distress rate includes any loan reported 30 days delinquent or worse. It also includes loans that are past their maturity date, in special servicing or a combination of these two. We also examined the most recent property-level net operating income figures and compared them to underwritten expectations.
Given the rapid surge in interest rates, these floating-rate loans have shown significant declines in debt service coverage ratios (DSCR). CRED iQ’s analysis uncovered that 59.2 percent of CRE collateralized loan obligation (CLO) loans are operating below a 1.00 DSCR net cash flow, down from 62.3 percent in November’s data. Net cash flow is a key variable in calculating a loan’s DSCR, which determines the strength and creditworthiness of a given loan.
Payment status
Looking across payment status, 31.9 percent of loans are performing matured (flat to November’s print), with 38.4 percent nonperforming matured (up from 32.4 percent in November), meaning 70.3 percent of the CRE CLO loans in our study are past their maturity dates, up from 63.8 percent in November. Delinquent loans that have not passed their maturity date accounted for 19.5 percent of the distressed loans, down from 23.3 percent in November.
Regional analysis
Our readers have asked us to examine CRE CLO distress on a regional level, and we are pleased to add that dimension to this report. Our analysis broke out CRE CLO assets to their respective metropolitan statistical areas to understand how the distress has manifested at the MSA level.
Indiana’s Indianapolis-Carmel area landed solidly in first place with 73.3 percent of their CRE CLO loans in some form of distress.
The Indiana MSA was followed by Richmond, Va., with 57.8 percent of their loans in distress. Columbus, Ohio, rounded out the top three with a CRE CLO distress rate of 46.7 percent.
Elsewhere in Ohio, the Cleveland-Elyria-Mentor MSA had one of the lowest CRE CLO distress rates at 2.8 percent, followed by Austin-Round Rock in Texas at 1.3 percent.
Analysis scope and methodology
CRED iQ consolidated all of the loan-level performance data for every outstanding CRE CLO loan to measure the underlying risks associated with these transitional assets. Our team examined $64.3 billion in active CRE CLO loans. Many of these loans were originated in 2021 at times when both cap and interest rates were low, and valuations high. These loans are now starting to run into maturity issues given the spike in rates.
Some of the largest issuers of CRE CLO debt over the past five years include MF1, Arbor, LoanCore, Benefit Street Partners, Bridge Investment Group, FS Rialto and TPG. The vast majority of the $79.1 billion in CRE CLO loans are structured with floating rates with three-year loan terms equipped with loan extension options if certain financial hurdles are cleared.
Mike Haas is the founder and CEO of CRED iQ.
