As much as a third of commercial real estate loans in European commercial mortgage-backed securities structures due to mature in the next two years are subject to “high” or “very high” refinancing risk, according to Berlin-based credit analyst Scope Ratings.
The consultant, which specialises in European credit rating, environmental social and governance and fund analysis, said almost 20 percent of CMBS loans maturing in 2023 and 2024 are facing very high refinancing risk as expected cashflows are not sufficient to meet lender requirements on debt yields. It added another 14 percent face high risk if interest rates rise by another 100 basis points.
Furthermore, Scope says sterling-denominated loans are at higher risk due to the extent of interest rate rises in the UK.
“The situation is more severe in sterling because interest rates have risen faster: as many as one-third of GBP-denominated loans maturing in 2023 fall into the very high-risk category,” the firm said, adding that this is further exacerbated in 2024.
In total, Scope said the 33 percent of CMBS loans due in 2023 and 2024 that are facing high or very high refinancing risk represents €500 million of euro-denominated notes and £1.1 billion (€1.2 billion) of sterling-denominated notes.
Borrower and lender challenges
The Berlin consultant said borrowers are in “wait-and-see mode” or are seeking loan extensions, in the hope that conditions become more settled before they are forced into injecting fresh equity or considering asset sales in a weak market.
“CRE borrowers face three parallel risks: tightening credit standards, rising debt costs and pressure on property values,” said Scope. “Banks are retrenching from new financings and alternative lenders are tightening financing conditions even if most property valuations are holding up so far.”
Scope expects valuations to gradually adjust as transactional evidence increases. It said the anchor value bias weakens as more borrowers fail to refinance and are forced into fire sales in a hesitant market with limited liquidity.
It added that property yields are slowly starting to widen, especially for non-prime and non-green assets, reflecting deteriorating market conditions and rental growth outlook.
“The origin of today’s difficulties lies in the last decade of extremely easy financing conditions,” it noted.
However, Scope added CMBS and CRE CLO noteholders tend to be better protected against liquidity and fire-sale risks due to mechanisms such as liquidity reserves, note protection tests, foreclosure periods and horizontal tranching, which help to limit imminent loss exposure and provide a buffer to navigate around troubled waters.