Performance of EMEA CMBS slowdown

Posted On Tuesday, 31 March 2009 02:00 Published by
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The performance of a number of commercial mortgage-backed securities and multi-family transactions in Europe, the Middle East and Africa deteriorated in the fourth quarter.

The performance of a number of commercial mortgage-backed securities (CMBS) and multi-family transactions in Europe, the Middle East and Africa (EMEA) deteriorated in the fourth quarter 2008, says Moody's Investors Service in its EMEA CMBS fourth quarter 2008 surveillance report.

Looking ahead, Moody's expects a further deterioration in EMEA CMBS loan performance.

Throughout the fourth quarter 2008, Moody's observed an increase in the cumulative number of loans within EMEA CMBS transactions that are on the respective servicer's watchlist, are in default and/or require special servicing.

"Given that a total of approximately 660 loans in large multi-borrower transactions are currently monitored by Moody's, the rising absolute number of loans which have either defaulted, been transferred into special servicing or put on the respective servicers' watchlists is still at a low level, but it is expected to rise significantly over the next couple of quarters and years," says Stephan Ebe, a Moody's Associate Analyst and co-author of the report.

Moody's also notes a nearly doubling in the number of loans that suffered a payment default and a rise in the number of instances of loans breaching their ICR/DSCR covenants due to decreasing property cash flows.

"This deterioration in property cash flows attests to the weakening of the occupational markets, with more tenants having difficulty making rental payments, the demand for space diminishing in certain occupational markets, and non-recoverable costs for borrowers being
higher than anticipated," says Deniz Yegenaga, a Moody's Associate Analyst and co-author of the report.

The worsening state of the commercial real estate lending, investment and property markets in the various EMEA countries had a negative impact on the ratings to varying degrees.

This affected both the junior and mezzanine Notes in EMEA CMBS transactions as well as some senior Notes during the fourth quarter 2008.

Overall, the ratings of a total of 35 classes of Notes in 20 transactions were downgraded by Moody's during the fourth quarter 2008. Moreover, 14 classes of Notes in six transactions were placed on review for possible downgrade.

An additional 39 classes of Notes remained on review for possible downgrade during the quarter, having been placed on review in the previous quarter following the insolvency of Lehman Brothers.

Looking ahead, Moody's expects the number of negative rating actions for EMEA CMBS to increase significantly in the coming months and quarters.

In early 2009, amid the ongoing adverse development of EMEA commercial real estate markets and subdued commercial real estate lending and investment activity, the rating agency adjusted its EMEA CMBS central scenarios which are used to analyse EMEA commercial real estate loans and CMBS transactions.

Moody's intends to finalise its property-by-property and loan-by-loan analysis of all outstanding EMEA CMBS deals against the background of these central scenarios during the course of H1 2009.

The rating agency anticipates that 20% to 30% of all Moody's rated senior EMEA CMBS Notes are likely to be downgraded by one to four notches, and 50% to 60% of all Moody's rated mezzanine (including junior Aaa Notes) and junior Notes will potentially be downgraded three
to seven notches.

While the exact rating impact of the adjusted central scenarios on the transactions will differ on a case-by-case basis due to the heterogeneous nature of EMEA CMBS, the transactions that are most affected by potential downgrades are those (i) with exposure in the most adversely performing property markets; (ii) with significant refinancing exposure in the near future (2009-2012);

(iii) that comprise highly leveraged loans (based on updated valuations); (iv) that closed in 2006 and 2007; (v) that are less diversified (in terms of loans, properties, property types, property locations, maturity dates, tenants and/or sponsors); (v) that show below-average property and/or rental cash flows quality; and/or (vi) that are subject to
below-average tenant and/or sponsor quality.

The report, entitled "EMEA CMBS Q4 2008: Surveillance Review", is a quarterly publication which reports the findings of Moody's ongoing monitoring of rated CMBS and multi-family transactions in EMEA.

Moody's EMEA CMBS monitoring team currently monitors 198 transactions.

Source: I-Net Bridge


Publisher: I-Net Bridge
Source: I-Net Bridge

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