UK CMBS Picture May Be Worse Than It Appears
Fitch Ratings says commercial property value declines are responsible for the swathe of downgrades of UK CMBS in recent months.
Payment arrears have increased in the last 12 months following tenant defaults, which have led to specific negative rating actions being taken. However, the majority of downgrades were driven by the severity of declines in capital values, which is not often communicated in conventional investor reporting.
Approximately 15% of UK loans are in breach of a covenant or in outright payment default, and although at a historical high, this figure understates the full impact of falling capital values on UK CMBS leverage,” - Mario Schmidt, Associate Director in Fitch’s EMEA CMBS Performance Analytics team.
Leverage is not consistently being tracked by servicers, and the Fitch loan-to-value ratio (LTV) is in part an effort to redress this and highlight the true state of UK CMBS. In the absence of re-valuations on the majority of loans, it combines Fitch’s assessment of property quality with quoted rental value and yield indices to estimate the likely current market value of the collateral.
“Although less than 10% of loans report an LTV above 100%, Fitch estimates almost 30% to be in negative equity. Over four-fifths of loans have Fitch LTVs over 80%, and given the scarcity of debt available at the moment, this leads us to believe that few of these borrowers would succeed in refinancing today,” says Gioia Dominedo, Director in Fitch’s EMEA CMBS team. “It may currently be of some comfort that few loans are set to mature in the short term, nevertheless without an improvement in lending market conditions the risk of default at maturity remains.”
Despite the magnitude of the rating actions taken, Fitch’s view on the UK commercial property market continues to be negative and, consequently, most tranches remain on Negative Outlook.
For details see Falling Values at the Root of UK CMBS Downgrades and UK CMBS Performance – Summary of Reviews and Rating Actions.
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