Collateralized Loan Obligation Balloon in Second Quarter

Borrowers modified $1 billion worth of collateralized loan obligations in the first quarter. In the second quarter, they quadrupled that sum.

More than $4 billion of CLOs — often reserved for floating-rate loans on buildings being renovated or leased up after construction — were modified in the second quarter, Bloomberg reported. The data was released in a report from DBRS Morningstar.

Modifying and extending a loan can help a borrower avoid distress and a default at a time when rising interest rates are making it harder to refinance. It may be easier these days for landlords to negotiate an extension in exchange for a partial principal payment, for instance, as banks and lenders reel in loan originations.

In the second quarter, originations across CLOs and CMBS transactions fell 79 percent from last July, according to a Newmark report, as lenders become increasingly choosier about their deals.

DBRS Morningstar executive Stephen Koehler told the publication that the rise in modifications isn’t necessarily a sign of increased trouble, as the assets tied to these adjustments aren’t specifically distressed.

A lack of financing options for borrowers, however, could make modifications more typical until the Federal Reserve stops hiking interest rates.

At the end of last quarter, the share of outstanding loans that had been modified increased from 6.5 percent of CLOs in the first quarter to 11.8 percent of CLOs. Nearly two-thirds of outstanding CLOs are on apartment buildings, according to the Commercial Real Estate Finance Council, a dicey proposition as skyrocketing rents in Sun Belt markets such as Austin and Phoenix begin to ease.

Modifications of CLOs grew at a faster rate from quarter to quarter than the delinquency rate. Additionally, the share of loans tracked by Morningstar in special servicing dropped from 0.74 percent in the first quarter to 0.66 percent in the second.

— Holden Walter-Warner