OREANDA-NEWS. A review of large loan floating-rate (LLF) commercial real estate deals issued between 2005 and 2007 reinforces our view that sponsors' business plans require careful evaluation and the risks of downside performance remain, Fitch Ratings says. It also reinforces our view that pro forma income earns no credit. LLF deals, often backed by transitional assets, are an important indicator as more than \\$300 billion of commercial real estate loans will need to be refinanced from 2015 to 2017.

2005 to 2007 LLFs have seen high defaults, but low incidence of losses. For those deals that have experienced losses, however, loss severities were 63.6% among a group of 25 loans with at least a 1.5% loss severity level. Of the \\$44.9 billion in collateral (509 pooled A-notes) in the 31 Fitch-rated LLF 2005-2007 transactions, 97.4% have either repaid in full (92.2%) or liquidated (5.2%). We expect additional losses on the 14 loans that remain as many have not yet stabilized and have been unable to refinance or sell. Of the loans remaining, 10 are hotel loans (77% by balance), two office loans (16%), and two retail loans (7%).

The largest losses were in hotels (54% of total losses), retail (25%), and land loans (16%). At securitization these hotels often featured repositioning plans or had revenue generating amenities, such as casino (3), spa (3), waterpark (1), or conference center (1). Of the original 509 loans, 41% were hotel by balance, followed by office (24%) and retail (14%). Additional losses stemmed from land loans and loans with a large reliance on pro forma income from repositioning an asset. When analysing these property types in newer transactions, Fitch remains conservative in its view of the long-term sustainability of cash flow.

The LLF peak vintages have experienced a high cumulative default rate of 30.6%. Many loans defaulted as a result of over-leverage and an inability to repay at maturity. Yet, only 17.5% of the defaulted loans experienced a loss (so far) as many loans that defaulted ended up paying in full. By comparison, the cumulative default rate for 2005-2007 vintage conduit transactions thus far is 21% (as of year-end 2014), although this number likely to increase as additional loans will be unable to refinance at maturity.