Claros Mortgage Trust Downgraded To 'B+' On Risks Related To COVID-19; Outlook Negative

  • We expect the economic impact of COVID-19 will increase commercial real estate loan delinquencies and credit costs, particularly on loans to transitional properties in the hardest hit sectors like hospitality and geographies like New York, which account for 19% and 50% of Claros' loan portfolio, respectively.
  • Deteriorating loans financed on repurchase agreements are likely to cause margin calls, which could strain the firm's liquidity, particularly if the economic damage is more severe or prolonged than currently expected.
  • As a result, we are lowering our issuer credit and senior secured debt ratings on Claros to 'B+' from 'BB-'.
  • The negative outlook reflects our view that Claros is likely to face further credit deterioration and margin calls as the COVID-19 economic slowdown continues, which could strain liquidity. That said, at this time we believe the company's low leverage, credit terms, and efforts to bolster liquidity should allow it to absorb potential margin calls under expected economic conditions.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today it lowered its issuer credit and senior secured debt ratings on Claros Mortgage Trust Inc. (CMTG) to 'B+' from 'BB-'. The outlook is negative.
The rating action on CMTG reflects our expectation that the credit performance of the firm's loans will deteriorate as a result of the COVID-19-related economic slowdown, which exposes the firm to margin calls on its repurchase agreement funding lines (accounting for approximately 70% of its funding liabilities). At this time, we believe that credit deterioration will be most severe on loans to transitional properties in the hardest hit sectors like hospitality and geographies like New York, which account for 19% and 50% of CMTG's loan portfolio,respectively .
Our ratings on CMTG reflect its:
  • Low but rising leverage;
  • Focus on higher-risk loans to commercial real estate (CRE) transitional, construction, and land properties;
  • Reliance on repurchase agreement funding; and
  • Relatively short operating history.
We view positively the company's access to resources, capabilities, and the industry knowledge of its sponsor, Mack Real Estate Credit Strategies L.P. (MREG), part of a well-established investor, developer, and manager of CRE.
While to date CMTG has had no credit losses in its relatively short history, and currently has no delinquencies or non-performing assets, we expect the COVID-19 economic slowdown to reduce borrowers' capacity to meet their loan obligations, as well as slow the pace of building construction and rehabilitation, and availability of take-out financing. In the near term, we expect this to increase margin calls on loans financed by repurchase agreement lines. We view positively CMTG's efforts to boost liquidity by materially scaling back originations and the slowing pace of borrower drawdowns against CMTG's funding obligations. While approximately 70% of CMTG's debt funding comes from repurchase agreements, we believe that its low leverage, credit terms, and efforts to bolster liquidity should allow it to absorb potential margin calls under expected economic conditions.
The negative outlook reflects our view that CMTG is likely to face further credit deterioration and margin calls as the economic slowdown related to COVID-19 continues, which could strain liquidity. That said, at this time we believe CMTG's low leverage, credit terms, and efforts to bolster liquidity should allow it to absorb potential margin calls under expected economic conditions. We do not expect debt to adjusted total equity leverage to increase materially above the fairly low 1.4x seen at year-end 2019.
Over the next 12 months, we could lower the rating if we expect:
  • Liquidity to be strained,
  • Covenants to be breached, or
  • CMTG to take material losses on its loan portfolio from a more severe or prolonged COVID-19-related economic slowdown.

Given the economic outlook, we see little upside over the next 12 months. However, if we expect the economic impact of COVID-19 to be less severe, asset quality is relatively stable, and liquidity remains adequate in our view, we could revise the outlook to stable.
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