The FINANCIAL — London-01 August 2011: Fitch Ratings says in a new report that the performance of European CMBS loans deteriorated during Q211, primarily due to an increasing number of maturity defaults.
The proportion of loans categorised as being fully performing decreased to 67.2% from 71.2% during Q211. This was primarily driven by a continued increase in the proportion of loans in maturity default, to 13.4% in Q211 from 10.4% in Q111. In line with this increase, the proportion of loans declared to be in default (15.4%) and in special servicing (16.3%) also continued to increase over the same period.
The size of the outstanding CMBS portfolio continues to shrink as an increasing number of loans reach their scheduled maturity dates. The number of outstanding CMBS loans (excluding granular transactions) fell to 603 in Q211 from 631 in Q111. While five loans realised a loss during the period, the drop mainly resulted from the redemption of higher-than-average quality loans.
"As adverse selection persists, the performance measures of the remaining loans continue to deteriorate," says Gioia Dominedo, Senior Director in Fitch's European Structured Finance team. "During Q211, the weighed-average interest coverage ratio of the portfolio dropped to 1.7x from 1.8x. This follows a similar drop from 1.9x in the previous quarter."
Leverage on the portfolio remained broadly stable during the period, with an unchanged weighted-average Fitch loan-to-value ratio (LTV) of 97%. Nearly 60% of loans have Fitch A-note LTVs in excess of 100%, indicating continued pressure on loans maturing in the coming quarters.
Despite the deterioration in performance, ratings remained broadly stable during the past quarter. The majority of tranche ratings remained unchanged (90.9%), with a further 2.2% being upgraded and 2.0% paying in full, while downgrades accounted for 4.9%. This stability results from the fact that the significant balloon risk is already incorporated in the current ratings. Where negative rating action was taken, this was typically driven by individual transactions underperforming compared to Fitch's expectations.
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