Refinancing cuts maturities from tsunami to lesser wave


CMBS debt due in 2013 is down, but 75% of loans are still failing to be repaid, writes Jane Roberts

This is the year that everyone had feared in terms of a spike in maturing European CMBS. Variously described as a train crash coming down the track or a tsunami of unfinanceable property debt, the 2013 volumes looked scary.

There was €22.8bn falling due in 2013, according to Bank of America Merrill Lynch’s Year Ahead 2013 report, published late last year – by a long way the largest annual total. Fitch Ratings’ 2013 estimate was comparable, at €21.5bn, and followed hard on the heels of another spike in maturities in 2012, of €10.7bn.

In total, that implied well over €30bn of debt maturing in 2012-2013 and with Fitch rating a further 81 loans totalling €11.9bn due to mature in 2014, its three-year total was €44bn of CMBS needing to be refinanced.

But CMBS doesn’t stand still; figures But CMBS doesn’t stand still; figures falling due this year were restructured ahead of maturity, pushing them out of the 2013 figures, while a handful were pre-paid. At the same time, work-outs for defaulted loans increasingly include some amortisation, which is shaving the debt pile too. As a result, by the end of Q1 2013, Fitch had slashed its figure for 2013 to 132 loans with a balance of €12.4bn. Standard & Poor’s latest figure is about €13.5bn this year and €9.5bn next (see fig 1 and 2 below).

Apr 2013, p12, i1

Apr 2013, p12, i2

A GRAND reduction

The most prominent deal by far to be ‘removed’ from the 2013 figures is GRAND (German Residential Asset Note Distribution), Deutsche Annington’s £4.4bn German multi-family housing securitisation. The borrower agreed a restructuring and extension of the loan to 2018 late last year, including aggressive amortisation, which it is so far comfortably on track to achieve (see p19).

This led BoAML’s CMBS analyst Mark Nichol to point out in a note last month: “Initially, the maturity profile of German multi-family housing CMBS was quite lumpy, with €14.0bn of loans falling due in 2013, which inspired countless ominous predictions from market commentators about the scale of defaults and liquidations that was likely to result from this refinancing ‘tsunami’.

“However, this problem did not materialise. Repayments and restructurings have dramatically reduced the scale and lumpiness of maturities in the sector,” (see fig 3).

Apr 2013, p13, i1Nichol now estimates that €9.1bn of German multi-family housing CMBS is outstanding, with €3.3bn due this year, but that €14bn has been repaid (see panel). While this is good news, the overall picture is still far from rosy. According to Fitch, at the end of last year an additional €7bn of loans had been extended, plus around 100 loans with a total balance of €7.4bn that were past their most recent maturity date (including past extensions) and remain outstanding in standstill, work-out or restructuring.

Meanwhile, about two-thirds to three quarters of loans are not being repaid at maturity (see fig 4).

Apr 2013, p13, i2

Restructuring options running out

Fitch analyst Mario Schmidt says: “A large number of loans have been extended over time and now bond maturities are creeping closer, which restricts the scope for further restructuring. That option is running out, because everyone is more aware of how much there is to do, especially with lower quality loans, to get them into shape for refinancing.

“Extensions now are coming with stricter repayment targets, whereas previously, some loans were just extended. Many of these now coming up have not improved.”

His colleague, Euan Gatfield, adds: “I think it was always unusual for a distressed loan where the borrower was not co-operat-ing to be given a blanket one- or two-year extension, but often the conditions were generous, for example, just to draw up a business plan. Now there seems to be a more punitive approach, to trap excess cashflow and lock down the collateral.

“It is a bit of a balancing act, however, because where the servicer feels that the sponsor has the expertise, they might pull back from a full cash sweep to keep the borrower incentivised.”

Mario SchmidtBond maturities are creeping closer, which restricts the scope for further restructuring… everyone is aware how much there is to do to get loans into shape for refinancing” Mario Schmidt, Fitch Ratings

A look at large loans repaid over the past 15 months shows that they tend to be better quality assets (see table). Central London offices – even those with high leverage, requiring asset management and re-letting – have been refinanced through sales backed with debt from new or returning lenders, with noteholders being repaid, although in some cases borrowers and junior lenders have taken losses.

Examples include Milton & Shire House, Devonshire Square, Woolgate Exchange, The Adelphi, CAA House and 120 Holborn, with buyers sourcing debt from MetLife, Goldman Sachs, Morgan Stanley and Deutsche Bank, in some cases topped up with mezzanine debt.

Owners have been able to refinance top- quality shopping centres, such as Value Retail’s outlet village portfolio, which was securitised in RBS’s Epic programme, while strong sponsors such as Henderson, Picton, Schroders and Manchester property firm Bruntwood have sold and/or refinanced assets, in the latter cases with insurers Canada Life and Legal & General.

Gatfield: “Refinancing conditions seem better, but loans maturing now are generally lower quality than those from a couple of years ago”

Outside the UK, German multi-family housing borrowers have been able to source a range of options to repay maturing transactions, including new CMBS issuance (see panel).

But Standard & Poor’s latest CMBS Monthly Bulletin, in March, pointed out that the resumption of new CMBS issuance “has not yet benefitted the vast majority of legacy loans, which continue to face long-term refinancing and repayment issues.

“These new deals have concentrated on loans that have low leverage, strong underlying assets and granular cashflows.”

Examples of legacy loans that did fit the bill for CMBS refinancing are the debt on Chiswick Park, a multi-let, south-west London office park, where the loan to Blackstone was securitised by Deutsche Bank in 2011; Intu’s shopping centres, which were refinanced by a hybrid CMBS last month; and Vitus’s Florentia issue for its 30,000 German multi-family housing portfolio last September.

Leading malls get refinanced

Standard & Poor’s says Intu’s (SGS) Finance Series 1 “had a loan-to-value ratio of about 50% and refinanced a number of previously securitised UK retail loans, secured by some of the UK’s leading shopping centres, providing a granular income stream”.

Despite increasing liquidity from new lenders and a rise in potential financing options, plenty of other CMBS deals are struggling and have not been refinanced.

The primary reason for this is that the value of collateral has fallen and loan-to-value ratios are too high to attract refinancing, problems compounded by out-of-the-money swaps and in some cases unmotivated borrowers.

Swaps have been a big pain. Put in place to fix costs for borrowers on the mostly short-dated loans underpinning floating rate CMBS, some were long-dated and are hugely out of the money.

This wasn’t necessarily clear when the deals were sold to investors, as Fitch pointed out in relation to the LoRDS 1 transaction, the secondary offices portfolio owned by London & Regional. Disclosure of the long- dated swap was, as Fitch put it, “sub-optimal”.

Last December, LoRDS 1 noteholders agreed three one-year extensions to October 2015 in return for increases in margins to 425 basis points for class A notes and 475bps for class Bs, and payment in kind notes worth 0.25% and 2% respectively – indicating at least what the borrower would have had to pay if it had been able to refinance.

Fixed-rate finance back in fashion

Some borrowers were so unhappy with swaps that they are opting for fixed-rate finance this time around. Schroder Real Estate Investment Trust completed an early refinancing of its outstanding £115m CMBS balance this month with long-dated, fixed-rate finance priced over the gilt, from Canada Life.

The CMBS was issued in 2004 when the cost of funds was just 20bps, but a condition was that the loan was fully hedged and part of the swap ran until 2016.

Schroder REIT investment manager Nick Montgomery says: “There were very high levels of mark-to-market net asset value volatility, which we felt was unhelpful when running a company that is trying to give investors an investment that reflects the direct property market.

“The shareholder base is primarily private clients and advisers, and many didn’t like the complexity and volatility of the swap. So with gilt rates at historic lows, these things aligned and we felt fixed-rate was the right thing to do.”

Canada Life, which has years of experience financing portfolios, also provided more flexibility about substituting assets in the security pool than the CMBS.

If anything, the rating agencies believe the refinancing problem is worsening again. “Refinancing conditions seem to be better, but loans maturing now are generally lower quality than those from a couple of years ago, so the trends are counteracting one another,” says Gatfield. “The main concern is that the vintages due now are closer to the peak of the market.”

In a reference to the more lax underwriting and spread of CMBS beyond the UK that took place at the top of the market in 2006 and 2007, he adds: “The portfolio is weakening in terms of property collateral, leverage and jurisdictions. It’s rather ironic that it is the weaker properties that are lumbered with the most leverage.”

Fitch’s Maturity Repayment Index, which reflects the balance amounts of loans paying after, as well as at, maturity, has been gently rising over the past 12 months, from around 40% to 46%, but Gatfield and Schmidt don’t expect that to last. “We think the repayment index is going to fall and that 2013 and 2014 will be quite a challenge,” Gatfield suggests.

Assets and loans count, not the vintage

Rob Leach, lead CMBS analyst at Standard & Poor’s, prefers not to generalise with regard to vintages: “Everything is asset and loan specific and a low-LTV, high-quality loan from 2007 will perform better than a high-LTV, poorer asset from 2005.”

However, he agrees that though the looming maturities are no longer new and shocking, “the scenario has not improved. Despite the fact that we saw this coming, we are not through the real estate cycle by any stretch of the imagination and I take a cautiously pessimistic view. When I see that less than a third of these loans have been refinanced, it means up to 75% have still to reach ultimate resolution.

“To the extent that refinancing isn’t coming back to the level that people could refinance at previously, there are losses to work through the system. So it would be wrong to think that we were steadily getting through. There’s potential for negative momentum, more deals have to be sold and fire sale prices to emerge, in turn affecting others, so there could still be a step down in value.”

Low-cost finance resolves Germany’s family crisis

Repayments and restructurings have dramatically reduced the €14bn ‘refinancing wall’ of German multi-family housing CMBS that had been due to mature this year.

According to Bank of America Merrill Lynch, €12.8bn, or 58%, of the €22bn issued since 2004 has been repaid and €9.1bn remains outstanding (see pie charts below). The amount now due to mature this year has been reduced from €14bn (at issuance) to €3.3bn (see fig 3).

In a note on the sector’s performance and relative value, published last month, Bank of America Merrill Lynch analyst Mark Nichol said: “The scale of repayment reflects the relatively low-cost finance that continued to be available in the German multi-family property sector in the wake of the financial crisis, in particular from German pfandbrief banks, which are able to use German multi- family housing loans as collateral in their covered bond issuance programmes.”

Of the €12.9bn that has been repaid, €10.4bn was repaid early or on time. The remaining €2.5bn were loans that had defaulted, of which €2.4bn was recovered.

As well as the restructuring and extension of the GRAND CMBS by five years, large loans in single-borrower CMBS deals that have been repaid include Immeo RF 2 (€1.4bn), refinanced by banks including LBBW and Berlin Hyp; Centaurus Eclipse 2005-3, where borrower Vitus’s Florentia CMBS repaid the €652m balance; and in multi-sponsor deals such as Windermere IX-X (€1.28bn).

Four smaller loans in multi-sponsor CMBS deals suffered losses, totalling €142.7m. The largest loss, of €86.4m, or 35.6%, was the Diva loan in Titan 2006-5, which defaulted after borrower Level One went bust in 2008. The 14 properties in Berlin and the former East Germany were sold to Blackstone in 2011 for €205m.

The €187m Tor loan in Mesdag Charlie also defaulted after the insolvency of borrower Speymill and made the second largest loss, at €38.8m, or 20.2%. Benson Elliot bought the 3,000 homes in Berlin, Frankfurt, Munich, Hamburg and Cologne in March 2012, with funding from Landesbank Berlin.

Apr 2013, p14, i1BoAML says: “Without an experienced and motivated sponsor to manage the properties, rental income may deteriorate, which may exacerbate losses.”

Apr 2013, p15, i1

In the case of the Diva loan, default interest was payable to parties outside the securitisation ahead of principal recoveries, which further increased the loss.