Top-rated European commercial mortgage bonds set for first losses since credit crisis

Financial Times

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Investors in several European commercial mortgage bonds that were originally sold with top credit ratings look set to suffer losses, say analysts, the first time since the global financial crisis that the safest tier of this debt has been hit.

Among those set for losses are holders of the most senior bonds in a commercial mortgage-backed security that originally made a loan to Oaktree Capital Management to finance three UK shopping centres. The recently agreed sale of the underlying properties is expected to raise less than the value of the outstanding debt.

Meanwhile, rating agency Fitch has predicted that investors in the safest tranche of two more CMBS deals, including one set up to lend to Brookfield, are also facing losses.

“Certainly as an investor you wouldn’t expect to see losses at triple-A level, it’s not a good headline,” said Elena Rinaldi, a portfolio manager in the asset-backed securities team at TwentyFour Asset Management.

Rising borrowing costs over the past two years have triggered the worst downturn in commercial real estate since the 2008 global financial crisis, with the value of offices, retail and other assets falling by between a third and a fifth from their 2022 peak in Europe.

More conservative levels of borrowing today than in the run-up to 2008 have meant that signs of distress have been slower to emerge among property investors this time around. However, the latest predictions of losses show that the pain in the property markets is now hitting even the most protected tier of real estate-backed credit investments.

The loan was transferred to Mount Street — a “special servicer” that tries to maximise the recovery for investors — in 2020 after breaching covenants, and has been in default since then.

Elizabeth Finance 2018 DAC, the CMBS vehicle set up to issue the debt, announced last week that Mount Street had accepted a £35mn bid for the shopping centres in King’s Lynn, Dunfermline and Loughborough, known as the Maroon properties. The bid would deliver net proceeds of about £31.5mn to debt investors, it said.

Holders of the most senior bonds are owed £33.6mn, according to Bank of America, and therefore under this proposal are set to incur a 6.3 per cent loss.

“The biggest problem has been interest rates, quite simply,” said James Bannister, head of special servicing at Mount

The full article is available here. This article was published at FT Markets.