The recent weakness in the credit markets means European CMBS issuance isn't likely to pick up significantly anytime soon, according to Standard & Poor's report.
At the same time, legacy European CMBS transactions continue to deal with the surge of loan maturities that began last year. "Borrowers' refinancing options remain limited, so as these maturity dates approach, special servicers are bound to have their work cut out for them," said analysts at S&P.
The upcoming maturities for commercial mortgage loans—coupled with limited refinancing options—are raising CMBS credit risk.
According to the report, as many loans come due in the current environment borrowers will likely continue struggling to refinance their mortgage loans. The credit market are tight as a result of the uncertainty in Europe and as a result lending standards have become stricter and real estate values are in many cases still significantly below their levels at loan origination, creating a "funding gap"—the difference between the balance of maturing debt and the amount of new debt the property can secure—for many borrowers.
Global real estate advisor DTZ estimates that the countries with the more significant overall "funding gaps" across all commercial real estate lending (including unsecuritized) are the U.K. with €30 billion, Spain with €20 billion, and Ireland with €9 billion equivalent.
S&P said that special servicers have extended some loan maturities when borrowers weren't able to refinance, however when loans are part of the collateral for a securitization, such loan extensions shorten the period between when the underlying loan matures and when the CMBS notes mature.
"This potentially limits the recoveries the servicer can achieve ahead of note maturity if the loan defaults, making it harder to ensure that the notes are fully paid by their scheduled maturity date," explained analysts in the report.
As a result, special servicers are stepping up efforts to work-out loans, rather than extend their maturities.
According to the rating agency, the pipeline of loan maturities remains full, with about 140 loans backing S&P rated CMBS universe due to mature by the end of July 2012. These loans, said S&P, account for about 9% of balances outstanding—or €8.0 billion equivalent.