LONDON--(BUSINESS WIRE)--KBRA UK (KBRA) releases research highlighting the impact to commercial real estate (CRE) borrowers in purchasing interest rate caps to utilise pre-existing loan extension options in a rising interest rate environment.
In the report, KBRA reviewed 20 European loans across 18 CMBS transactions from 2018 to 2022 in our rated universe. We used the latest information found in quarterly servicer reports along with loan-level documentation to calculate the maximum strike rate that borrowers could purchase interest rate caps. To ascertain the level that coverage levels could fall if borrowers are unable or unwilling to hedge at their extension options, we stressed Sterling Overnight Index Average (SONIA)-referenced loans to 5.0% (currently at 2.2%) and three-month Euro Interbank Offered Rate (Euribor) loans to 2.7% (currently at 1.3%). We then highlighted those that subsequently fall below an interest coverage ratio (ICR) of 1.2x.
Key Takeaways
- Extensions options common; requirements vary: A total of 14 loans have extension options prior to final loan maturity. Further, seven of these allow caps to be purchased with higher strike rates if certain ICRs are met, while six require caps to be purchased at their existing strike rate and one stipulates that a hedge must be in place via an extended swap or a cap.
- UK loans more exposed to rising rates: There were five UK loans that would be exposed to ICRs of below 1.2x in a rising interest rate environment if hedging was unavailable.
- SONIA is currently above the strike rate for most loans: Currently, seven out of nine SONIA loans have hit the strike rate on their caps compared to just one of the 11 Euribor loans.
Click here to view the report.
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About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
