Euro CMBS Still Faces Financing Challenges

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Although European CMBS saw a boost in new issuance in September, with two transactions closing in a single month for the first time since August 2007, Standard & Poor's said in a report released today that this activity is not indicative of a “sustainable rebound.”

CMBS issuance year-to-date, stands at €4.1 billion (€5.2 billion) including those transactions that originators have retained, according to the rating agency. However, CMBS remains only 2% of overall European securitization issuance so far this year.

One of the deals is a ₤463.2 ($735.4 million) million transaction from the Royal Bank of Scotland that securitized a portfolio of nonperforming commercial real estate loans called Isobel Finance No.1 Plc. The other is Deutsche Bank's €754 million securitization called Florentina 2012-1, which is a refinancing of a previous German CMBS loan.

"We do not expect this recent boost in new issuance to be a sustainable rebound. Negative developments in the commercial real estate markets clearly have ramifications for CMBS,” said Arnaud Checconi, a credit analyst at the agency. “Commercial property prices went through a sharp correction over the past few years. Beyond the negative wealth effect for landlords, lower prices have significantly curtailed borrowers' refinancing prospects, which is a clear negative for CMBS credit performance. As such, the annualized loan maturity default rate reached 13.9% in September."

Financing for property investment continues to be a problem and in CMBS transactions, maturing underlying loans are still defaulting while ratings continue to deteriorate, S&P stated in the report. Refinancings have been held up in Europe as some major lenders have withdrawn from property lending, while some others have been actively shedding legacy property-related assets.

The lenders that are still active in property lending have adopted more conservative underwriting policies. S&P said in the report that insurers' lending capacity is unlikely to fill the gap that banks have left behind.

S&P lowered many of its European CMBS ratings over the first nine months of 2012. The ratings agency said in the report that it took 432 rating actions altogether, including 331 downgrades and only 12 upgrades (plus 82 rating withdrawals and seven affirmations), representing a downgrade-to-upgrade ratio of 28.

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