Worst is yet to come for European CMBS

* October a huge month for loan maturities

* Tough 2013 forecast as German multifamily loans come due

* Borrowers' refinancing options scarce

By Anil Mayre and Owen Sanderson

LONDON, Oct 5 (IFR) - October will be a challenging month for the European CMBS market, with 22 loans due, according to Fitch. The final quarter as a whole has 24 scheduled to mature, worth around EUR2.5bn, and next year around ten times that amount is due.

Around two thirds of the loans have an LTV exceeding 80%, which restricts the potential to refinance, the agency said. Nine of the loans have already been extended, but servicers could become less lenient.

"Servicers are now taking a tougher line on extensions, meaning that more defaults are likely, especially as more EMEA CMBS transactions enter their tail periods," said Euan Gatfield, head of EMEA CMBS at the agency in a report.

The outstanding stock of CMBS loans fell to EUR76.5bn in Q3 2012, from EUR80.2bn the previous quarter and EUR83.5bn in Q3 2011. The percentage event of default also dropped, to 25.2% from 25.6%, but the proportion of loans in special servicing increased, to 25.2% from 24.8%.

Balloon defaults rose by a larger margin during the previous three months, to 32.1% from 30%, further illustrating the difficulties in the sector.

The agency digs deeper into certain statistics because low interest rates are masking true loan performance.

For instance, Fitch notes that a number of loans are showing high interest (ICR) and debt service coverage (DSCR) ratios.

"This is the clearest example of the effect of reporting standards for floating-rate loans where they look through interest rate hedges, as well as of a rising number of extended floating-rate loans benefiting from lower interest rates," said Gatfield and Mario Schmidt in the report.

Low rates inflating interest coverage also understate loan leverage, the agency warns. A weighted average reported LTV of 83% should really be around the 98% mark, it says.


There have, however, been bright spots in the market during the last few months, such as the Lumiere loan's EUR377m prepayment in Quirinus (ELoC 23).

This innovative refinancing was achieved through the sale of a EUR472m mortgage bond arranged by BNP Paribas that was placed with French institutional investors.

Another atypical loan refinancing method featured insurance investors picking up the slack in the bank market.

UK asset manager Picton refinanced its CMBS by obtaining GBP209m of funding from Aviva and Canada Life on a 10-20 year repayment plan. Aviva provided GBP95m and Canada Life GBP114m.

Elsewhere, Deutsche Bank refinanced the Vitus portfolio originally securitised in Centaurus (Eclipse 2005-3) by selling the Florentia CMBS two weeks ago. And last week RBS placed a GBP463m CMBS with real money accounts to refinance the vendor finance loan within the Project Isobel asset transfer.

But these are just a few successful instances in a market that is actually yet to face its biggest challenge - 2013 is the busiest yet for European CMBS loan maturities.

"With more than 150 large loans due for refinancing representing more than EUR23bn, 2013 will be the turning point of CMBS performance. Refinancing by new CMBS transactions would have been a natural exit for those loans, but the number of new transactions to date (such as Flore 2012-1 CMBS) has been very limited due to the small number of real money investors entering this market," said Christophe Noaillat, associated managing director at Moody's.

The prognosis for these loans is gloomy. "Moody's expects a large majority of loans to default in 2013 and to be worked out in subsequent years," warned Noaillat.

S&P recently estimated that cumulative maturity defaults in 2013 could exceed those in 2009 to 2012 combined, hitting EUR12bn.


Germany and the UK account for over half of the maturities next year. More than EUR1bn of German loans mature in each of January, May, and July in 2013, largely multifamily properties.

"The basic opportunity in the German market is EUR40bn of securitisation funding that has to be restructured, defaulted or refinanced," said James Drayton, who will be running the expansion of special servicer Solutus Advisors into Germany.

"We've had enquiries come in from people that want us to work on some German assets."

Private equity firms are particularly active in German multifamily CMBS, which may ease refinancing conditions for those particular assets. Terra Firma plans to inject EUR504m into GRAND, the largest CMBS in Europe, to delever the transaction and smooth refinancing.

As well as performing multifamily private equity owners like Terra Firma, the major US private equity firms are looking for distressed opportunities in Germany.

"The interest in distressed assets from across the Atlantic extends the opportunity for us," said Solutus' Drayton.

"More buyers, willing to take on riskier assets provide more workout options. We also have an advisory business that works with these sorts of clients," he added.

The coming loan maturities will also bring trouble if they crystallise swap costs.

Borrowers paid swap counterparties fixed-rate amounts to receive Libor-based payments. As interest rates plummeted (three-month Libor pushed 7% in September 2007, falling more than 6% from that peak to its current level of a little over 0.5%), borrowers were stuck paying higher fixed rates but received paltry Libor-based funds.

The swap break costs are particularly punitive in certain deals. Gemini (Eclipse 2006-3)'s swap break charge exceeds GBP200m because of the 20-year term of the agreement.

The current swap break cost is above GBP100m in Ulysses (ELoC 27), while in LORDS 1, the current mark-to-market swap is around GBP45m. The borrower is currently trying to extend the loan maturity.

(Reporting by Anil Mayre and Owen Sanderson; Editing by Alex Chambers and Julian Baker)

((anil.mayre@thomsonreuters.com)(44 20 7542 3455)(owen.sanderson@thomsonreuters.com)(44 20 7542 8234))