Europe bundled mortgage defaults hit two-year high; Nearly 80% of CMBS due to mature Q4 2013 fail to repay principal

January 20, 2014 3:44 pm

Europe bundled mortgage defaults hit two-year high

By Christopher Thompson

The default rate of “sliced and diced” loans backed by commercial mortgages in Europe has hit a two-year high, highlighting difficulties in resuscitating the securitisation market.Nearly 80 per cent of holders of 31 commercial mortgage-backed securities, representing €2.3bn in loans and which were due to mature in the last quarter of 2013, failed to repay their principal completely, according to Moody’s, the credit rating agency. The figure, driven upwards by high levels of leverage, is the highest quarterly default rate for two years.

“You had a quarter of particularly weak loans – on a rolling average basis we’ve seen a repayment rate of the principal of around a third in the previous year,” said Andrea Daniels, an associate managing director at Moody’s.

“One of the big credit negative implications has not only been poor performance – which means value decline – on underlying secondary quality properties but a lack of finance available to refinance these types of properties . . . therefore you have this very low repayment rate.”

CMBS package pools of commercial mortgage loans for sale to fixed income investors. About half of the loans which defaulted were secured by assets in the UK while nearly a third had their assets in Germany.

The figures sound a warning for securities investors who have helped propel a modest resurgence in Europe’s CMBS market.

Overall CMBS issuance, virtually zero in 2009, touched $6.4bn last year, up from $2.5bn in the same period in 2012, according to Dealogic, the data provider.

Both European and US governments have sought to encourage bank-led mortgage lending to stimulate wider economic growth.

Part of the reason CMBS sales shot up is that borrowers took advantage of record-low interest rates to refinance their loans. However, one London-based CMBS analyst said recent issuance reflected more realistic valuations compared to a pre-crisis boom.

“It’s a cyclical sector,” the person said. “We’ve been through the pain and moved through a more appropriately priced place post-crisis.”

Since the pre-crisis loans were made, assets such as office developments and out-of-town retail parks, have fallen in value since 2009. Moreover, many of the loans contained within the CMBS had loan-to-value ratios of more than 90 per cent. A little more than a third of the CMBS were repaid fully at maturity in the previous four quarters.

About €14.6bn of European CMBS are due to mature or refinance in 2014.

Historically banks have sold CMBS and other asset-backed securities to fixed income investors seeking steady interest payments while freeing up more capital for loans.

Amid a gloomy few years for Europe’s securitisation market some analysts have predicted that issuance from eurozone peripheral countries, such as Italy, will increase this year as banks try to take advantage of investors’ higher risk appetite in their hunt for yield.