Fitch Ratings said that the number of defaulted European CMBS loans is likely to increase, despite recent improvements in the sector.
In a performance update published today, the agency said that over 10% of loans in non-granular European CMBS rated by the agency are now in some form of default. In Q1 2010 ten further loans defaulted as they failed to make the final repayments at their scheduled maturity dates, while others missed ongoing interest and principal payments.
"The improved sentiment in the commercial property market has yet to flow through to CMBS performance," says Mario Schmidt, associate director in Fitch's European Structured Finance team. "Although the values of some commercial properties now appear to have stabilised, many borrowers have little or no equity left in these loans and hence limited incentive to support them or proactively seek ways of making the balloon repayments."
Of the 73 non-granular loans that are in default in Fitch-rated European CMBS transactions, over 20% of them have reached their scheduled maturity dates. Over the next 12 months a further 111 loans are scheduled to mature and, based on the experience to date, it seems likely that a significant proportion of these will also default.
The commercial property lending and investment markets have recovered somewhat in recent months, although only the values of the most prime assets have increased significantly from their lows.
Unless such improvements spread rapidly to the lower-quality assets that provide the majority of the collateral for European CMBS, the number of loans that default following their scheduled maturity dates is set to increase.
In Q1 2010, a small number of the loans in special servicing were either repaid or successfully restructured. There are only few loans that have been through a full workout process with recoveries allocated to noteholders, partly because servicers were trying to avoid this course of action given recent distressed market conditions.
In Fleet Street Finance 2 plc noteholders voted to extend not just the loan maturity, but also the note maturity, in a negotiated restructuring. This was intended to provide the borrower with more financial flexibility and hence improve the prospects of repayment. This sort of negotiated settlement between borrowers and noteholders may become more prevalent if noteholders consider recoveries will be maximized through such a restructuring.