CMBS Defaults Rising and Survey Shows Conservative Investor Outlook, Says Fitch

U.S. senior fixed-income investors are taking a more conservative view of cross asset credit conditions on the back of recent macroeconomic concerns, according to a Fitch Ratings fixed-income forum survey of fixed income professionals, conducted in June.

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Investors expressed a more downbeat view of U.S. growth. In January, 43% of investors saw growth above 3% over the coming year. Now, however, they are roughly split (51%/47%) between those that believe U.S. growth will be moderate—in a range of 2% to 3%—and those expecting weaker growth of below 2%.

Improving labor market conditions received more attention than in prior surveys as a factor critical to the U.S. recovery, more so than financial stability in the Euro zone or home price stabilization. The majority of the investors participating in the survey (48%) said they still saw an 8%-9% U.S. unemployment rate by year-end 2012.

Professional money managers surveyed consider the sovereign debt crisis the top risk factor. Inflation fell further off the radar as a near-term worry. The prospect of weaker economic growth manifested itself in the outlook for specific industries and spreads.

The survey results also showed that areas that previously had a majority of respondents predicting spread tightening, now carry a more balanced view. These included speculative grade corporates and some structured areas, particularly CMBS.

Meanwhile, in another Fitch analysis, the credit rating agency said the U.S. CMBS default rate jumped to 12.9% at the end of the second quarter of 2011, marking a 228 basis point increase since the end of 2010.

“Highly leveraged loans from recent vintage CMBS are also still defaulting at an elevated rate,’ said Fitch Managing Director Mary MacNeill.

The report noted that the default rate for each vintage from 2005-2008 spiked over 200 basis points since the end of 2010, with 2007 gaining the most with a 549 basis point jump. The largest four newly defaulted loans were originated in 2007, Fitch stated.

New defaults have declined this year, dropping 59% from 1Q11 to $4 billion. The rating agency said $9.95 billion in new fixed rate conduit CMBS has been rated by Fitch in 2011.

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