Distressed CLO Increases Nearly 400% from Year-End 2022
The distressed loan rate among commercial real estate (CRE) collateralized loan obligations (CLO) originated prior to 2023 rose nearly 400% year-over-year from the end of 2022, Kroll Bond Rating Agency (KBRA) reported. The distress rate ended 2023 at 5.4%, compared to 1.4% at year-end 2022.
Meanwhile, KBRA reported the rate of loan modifications is up more than 100% for the same period, to 16.7%. The loan modification rate was 7.9% as 2022 ended.
Multifamily, representing 69.9% of the aggregate outstanding loan balance, performed better than average, with a distress rate of 4.3% and modification rate of 12.7%. At the other end of the spectrum, office, with the second-highest concentration at about 13.3% of the loan balance, had a distress rate of 12.3% and a modification rate of 35.4% at the end of 2023.
“The worsening CRE CLO loan performance has been influenced by higher interest rates and challenged business plans, especially among multifamily and office properties that make up over 80% of the outstanding loans,” KBRA reported.
Multifamily has experienced slowing or negative rent growth and higher operating and insurance costs, while the office sector continues to face secular demand shifts, contributing to weak leasing activity. “This has led to a number of deals in recent months not meeting their interest coverage and overcollateralization note protection tests as loans became delinquent,” according to KBRA.
