While US CMBS loans have been put into special servicing at a rapid rate since the onset of covid-19, it was the case with just one loan in the far smaller European CMBS market at the time of publication.
However, on November 4, London-based servicer Mount Street announced it was in negotiations with a vehicle owned by investor London & Regional, the borrower of a securitized £348 million (€386 million) UK hotel loan provided by Morgan Stanley, over a debt yield covenant breach. It said an urgent equity injection or loan repayment was needed, although a resolution had not been reached by press time.
Paul Lloyd, Mount Street’s managing partner and global head of financial and business services, is not surprised by the lack of European loans requiring special servicing: “A lot of the loans which were securitised in recent years have low loan-to-values. Also, many were securitized in sponsor-led deals, in which a lot of financial covenants were negotiated out of the transactions.”
His colleague, head of primary servicing Serenity Morley, adds that CMBS is a far smaller part of Europe’s property loan market than it was before 2007. She says most deals feature a single sponsor, in contrast to pre-2007 conduit deals which securitised multiple loans to several borrowers.
Morley says European servicers have more scope than their US counterparts to tackle problems in primary servicing. In the US, amendments to loan terms usually require a move to special servicing before a default has occurred.
She says it is essential that primary servicers understand the nuances of each deal’s documentation so that, if problems arise, they know the options to deal with them before special servicing becomes necessary. “There are different ways to make sure the primary servicer can approve consents and amendments,” she explains.
A wrong call by a servicer could lead to noteholders losing money during a period of forbearance, until the next opportunity to put a loan into secondary servicing, adds Lloyd. He explains that, in uncertain market conditions, it makes sense for servicers to grant borrowers requests for loan term amendments on a short-term or rolling basis, rather than granting extended covenant waivers. “If market conditions deteriorate, and long waivers have been agreed, the servicer cannot take action, potentially meaning bigger losses for noteholders.”
Across Mount Street’s servicing portfolio – including securitised and non-CMBS loans – Morley estimates around 40 percent was subject to some sort of amendment between July and October. Lenders’ responses are asset class-specific, she adds. “Retail and hotel loans are subject to interest and principal deferrals, whereas amendments to loans secured against office or mixed-use assets are usually related to lease amendments or potentially financial covenant waivers.”
Lloyd believes the market is in a holding period: “Lenders will only extend forbearance so far. We expect to see the real defaults happen towards the end of this year and into early 2021.”