Fitch Ratings today released a report looking at the global exposure to refinancing risk in the structured finance and covered bonds markets.
According to the report, CMBS and CLOs are the areas with the most potential exposure to refinancing risk.
Within these sectors, refinancing risk is usually a more pressing issue in Europe and Asia versus the U.S. with more immediate 'walls' of maturity peaks as well as less refinancing sources available to these regions.
The ability to refinance across all financial markets is impacted by general market confidence, Fitch said. For the structured finance and cover bond sectors particularly, the nature and profile of the supporting obligations have a considerable influence on the refinancing ability of the transactions in these markets.
The evolving regulation and capital and liquidity requirements for bank and insurance company buyers will also affect the refinancing of existing deals, whether via new structured finance or covered bond deals or other funding alternatives, the rating agency said.
Fitch explained that the underlying CMBS loans usually have only a limited degree of principal amortization before the loans mature, which results in the need to refinance to repay the loan.
In the cases of Japan and Europe, CMBS was a comparatively recent funding source with origination concentrations in peak pre-crisis years. CMBS usually funded loans with high LTV ratios and secondary and tertiary property as loan security. Given the financial crisis, commercial property lending for the most part has been hit by tighter standards. For instance, lower LTV requirements, which has made refinancing CMBS loans harder in these sectors, Fitch stated.
The U.S. is the biggest CMBS region and, although loans depend on refinancing for repayment, peak loan maturities are further into the future and subsequent tail periods are typically longer, the rating agency said.
The risk of refinancing is thus less immediate than other markets and there remains more time to work out loans or take advantage of any recovery in lending should it arise. Unlike Japan and Europe, CMBS issuance has revived in the U.S. after the financial crisis, although on a much lesser scale. While high-quality properties face few issues in obtaining refinancing, those CMBS secured on more secondary and tertiary property might have problems unless commercial property financing expands further.
For U.S. leveraged loans securing CLOs, the recent heavy loan refinancing activity has hindered a considerable portion of near-term loan maturities, driving a big part of maturing debt beyond 2015.
New leveraged loan and high yield bond issuance is anticipated to further extend loan maturities. But, Fitch said that the sector's capacity is driven by how many active CLOs there are and will need a continued flow of new CLO activity for future leveraged loan maturities to be absorbed. By contrast, the rating agency said that only the better European credits have been able to tap high yield bond markets after the financial crisis and new CLO issuance is limited.
Covered bonds usually have bullet maturities, but are supported by longer-term amortizing assets, including residential mortgages. Issuers are thus dependent on being able to refinance underlying portfolios to meet covered bond maturities. However, issuance generally stayed strong in covered bonds, although periods of stress have been alleviated via the placement with central banks, Fitch said.
Covered bond issuance is probably going to be supported by comparatively favorable regulatory treatment and investors desiring secured lending, the rating agency reported.