CMBS and multi-family transactions in Europe, the Middle East and Africa (EMEA) are becoming increasingly affected by the continued financial market turmoil and the worsening conditions in some countries real estate markets, Moodys Investors Service said in a new special report.
"The number of loans experiencing adverse issues is growing, as can be seen from the number of loans which have been added and have remained on servicers watchlists over the past four quarters," said Viola Karoly, an associate analyst at the rating agency.
Since the last quarter, the number of defaulted loans and loans in special servicing has also increased, although the overall number of these loans is still low compared with the total number of loans monitored by Moodys. The rating agency said it downgraded 33 tranches and upgraded nine tranches in 2Q08. All but one of these downgrades was a result of Moodys downgrade of bond insurers MBIA Insurance Corp. and Ambac Assurance Corp.
Moodys said it anticipated a further increase in the number of loans experiencing adverse issues, although it did not expect a significant impact on its rated EMEA CMBS classes in 3Q08.
However, certain transaction types might be more exposed than others to potential loan performance-related rating sensitivity, particularly those transactions which depend on loan refinancing in 2008 and in the first half of 2009 and are geographically concentrated in certain regions/sectors, or those which may be sensitive to tenant rating changes or tenant defaults due to the current market turmoil.
All of this could lead to additional rating volatility in some CMBS market segments and, together with declining loan prepayment rates, contributing to the overall expectation that the trend of a highly positive upgrade/downgrade ratio experienced in previous years is not expected to continue.