KBRA Releases Research – European CMBS: Refinance Risk

LONDON--(BUSINESS WIRE)--KBRA UK (KBRA) releases research on the refinance ability of commercial mortgage-backed securities (CMBS) loans originated since 2018 and maturing by year-end 2026, current hedging strategies, and loan extensions in the current rate environment.

Key Takeaways

• KBRA identified 14 loans (39% of this report’s sample pool) with maturity dates through 2026 with weak refinance profiles.
• Although most (nine) of the loans determined to have a weak refinance profile had moderate valuation loan-to-values (LTV) ranging from 54.8% to 65.4%, they generally had base case refinance interest coverage ratios (ICR), which considers the current interest rate environment, of close to or below 1.0x.
• Loan metrics are not the only determinants of refinance ability. Other variables such as property type, location, the presence of subordinate debt, and the property’s performance trend are equally important.
• There have been at least four instances (11% of sample pool) where the servicer has allowed the borrower to amend the hedge strike rate due to market conditions when exercising a loan extension option.
• The two European CMBS transactions issued so far this year have both featured an interest rate hedge that is lower than the related index rate. If interest rates remain elevated, sponsors may continue employing this strategy if they are willing and able to purchase these more expensive hedging instruments.
• Over the last 12 months, borrowers for six loans that serve as collateral across four CMBS transactions requested final maturity extensions, with five of those requests granted. The six loans were collateralised by office or retail properties in Italy, Finland, and the Netherlands.

Click here to view the report.

Related Publications

• Four European CMBS Loan KPOs Revised to Underperform
• Rising Interest Rates to Increase Hedging Extension Costs and Refinance Risk
• CMBS LTV Covenant Breach Risk on the Rise

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.