KBRA Releases Research – Churn Rates in Managed CRE CLOs

Kroll Bond Rating Agency (KBRA) examines collateral turnover in recent vintage managed commercial real estate (CRE) collateralized loan obligations (CLO) transactions. Managed deals currently comprise more than two-thirds of year-to-date (YTD) 2021 issuance, which has shaped up to be a record year for CRE CLO volume. One of the main structural features of a managed CRE CLO is the ability for the manager to acquire new mortgage assets from principal proceeds received during a reinvestment period. The feature provides the issuer with a stable funding source and more cost-effective way to fund the ongoing origination of transitional loans compared to static or lightly managed transactions. However, it can create uncertainty owing to changes in collateral composition that may occur during the term of the transaction.

Key Takeaways

• The average churn rate during the first 12, 18, and 24 months following securitization was 24.0%, 43.3% and 63.7%, respectively.
• There was wide variability in the results by transaction. For example, over the first 12 months, seven transactions had a churn rate of <10%, while five had a churn rate of >40%. By the second year, five transactions had churn rates of ≥90%, while at the other extreme one transaction had a low of 25.6%.
• The churn rate for transactions issued in 2019 was noticeably down from previous years, at 18.9% and 35% in their first 12 and 18 months, respectively. This compares to 2017 and 2018 vintages, which saw rates at 31.2% and 54.5% for the same 12 and 18 month periods, respectively. Although there may be other factors involved, much of the slower churn is likely the impact of the COVID-19 pandemic on business plans in 2020.

Click here to view the report.

Related Publications

• CRE CLO Research Handbook
• CRE CLO Loan Default and Loss Study
• CMBS Trend Watch: July 2021

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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