Fitch has placed $7.76 billion of hotel-backed commercial mortgage securitizations on watch for potential bond downgrades, due to an expected collapse of near-term travel and tourism revenues from the coronavirus outbreak.
Thirteen of the deals are further concentrated in being backed by a single large-sized property, most of them high-priced resorts in Florida and Hawaii. Two other transactions placed under watch involve portfolios of Motel 6 and La Quinta Inn properties that are each owned by a single borrower.
The ratings watch involves 81 classes of various rated notes across the deals.
Fitch cited the “significant economic impact” expected to afflict the resorts due to the sudden reduction in travel and tourism – or indefinite closure for certain hotel properties in gateway cities.
“Fitch expects many of the hotels in the 15 transactions will experience significant declines in property-level cash flow in the short term with some turning negative,” the agency stated in a release.
All 15 deals under review by Fitch Ratings are whole-loan securitizations, which as single-borrower transactions are more vulnerable to cash flow disruptions than conduit fusion CMBS offerings that have a greater diversity of sponsors.
The properties underlying some of the deals include the Margaritaville Beach Resort in Hollywood, Fla. (pictured above), the Hilton Orlando, the Ritz Carlton Kapalua in Maui and Turtle Bay Resort in Oahu.
However, Fitch believes the borrowers will continue to support and maintain the properties, since most have enough of a debt-service coverage ratio cushion to withstand volatile or interrupted cash flows over the coming months. The borrowers (which include private-equity firms like Blackstone and KSL Capital Partners) on the floating-rate loans could withstand declines of between 47% and 84% in net cash flow but maintain DSCR’s above the break-even 1.0x level.
Each of the deals was underwritten in the past three years, as more sponsors and operators turned to the single-asset, single-borrower (SASB) instrument to finance mortgages at rates lower than bank loans but with floating rates that attracted yield-hungry institutional investors during a rising-rate environment.