Understanding Shortfalls in CMBS

by: Research Recap

Fitch explains how interest shortfalls are allocated in transactions and how and when they can be recovered.

Declining U.S. commercial real estate fundamentals are likely to induce more interest shortfalls well into next year, according to Fitch Ratings. Fitch expects CMBS interest shortfalls to increase in size and magnitude through 2010 or until the commercial real estate market recovers.

Interest shortfalls occur when fees and expenses associated with troubled loans reduce the amount of interest available to be paid on CMBS bonds. When the interest shortfall takes place, interest is then deferred, with subordinate CMBS classes usually the first to be affected.

The prolonged downturn in commercial real estate increases the possibility that additional bonds will incur interest shortfalls.

Given the expected increased impact of interest shortfalls, Fitch’s report provides guidance on the causes of interest shortfalls, how they are allocated in transactions and how and when they can be recovered.

CMBS Shortfalls

For details see Understanding Interest Shortfalls in CMBS Transactions.