NEW YORK--(BUSINESS WIRE)--
Kroll Bond Rating Agency (KBRA) has observed meaningful prepayment activity in 2017 and early 2018 vintage commercial real estate collateralized loan obligations (CRE CLOs). In fact, nearly a quarter (24.1%) of a study population of 428 loans were paid off—of this amount, 89.3% were in advance of their initial maturity. The prepayments led to increases in credit enhancement levels, which had a positive impact on rating activity. In 2018 and year-to-date 2019, KBRA has upgraded 11 notes from eight 2017-18 transactions owing to deleveraging that occurred due to loan payoffs. As a result of the prepayment activity, we believe it would be helpful to shed light on some of the trends observed in the market.
CRE loans in collateralized loan obligations are generally used to provide bridge financing for borrowers with transitional properties. In many cases, the borrowers are seeking to improve the properties so they can achieve higher occupancy or rents, in order to generate higher cash flows. Following stabilization, financing options become available with lower rates, longer terms (if desired), and potentially more proceeds. Not surprisingly, the CRE CLO loans generally offer prepayment flexibility. The prepayment terms are highly negotiated and would reflect, to some degree, the expected time frame to stabilize the property. Prepayment flexibility, however, adds to the challenge of determining the duration and maturity of CRE CLO notes.
Key observations from the report are as follows:
- Length of the initial loan term is a leading indicator of when prepayment may occur. Lenders and borrowers are aware of the extent and timing of business plans and will generally structure loan terms that meet those needs.
- Factors that could influence the time it takes to achieve a business plan show up in a loan’s propensity to prepay. For example, larger properties or assets with more extensive business plans show slower prepay speeds, as expected.
- There are observable differences in prepayment speeds based on property type: Multifamily experiences the fastest prepayment speeds, while lodging and office are the slowest.
- There was no significant extension activity so far, although many of the loans have limited seasoning and have not reached their initial maturity date.
To view the full report, click here.
Related Publications: (available at www.kbra.com)
- Managed CRE CLO Eligibility Criteria: An Inside Look
- CRE CLO Tend Watch: Year-End 2018
- CRE CLOs: A Primer, Today’s CRE CLO Aren’t Yesterday’s CRE CDOs
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.