Underwriting standards in the European hotel commercial mortage-backed securitization market have become increasingly aggressive, according to Citigroup. The firm's European Securitised Products Strategy research paper says two recent rating actions by Standard & Poor's have highlighted that there are deals in the market where the underlying pool quality has deteriorated. On April 4, S&P placed Titan 2006-5's Class F notes on negative watch when the Balneario Blancafort loan, worth 6% of the pool, entered special servicing after being 60 days delinquent. Also on the April 10, S&P placed class D&E notes of Deco 2005-C1 on negative watch, after three properties on the Kashani loan were considerably devalued

"[Looking] at the drop of the appraised value of the Kashani properties, the questions arises as to whether underwriting has become too aggressive," the paper said. "While DECO 2005 C1's Kashani loan was small relative to others, ratings agencies had mentioned the high proportion of hotel and leisure assets in the deal, and expressed concerns on the main tenant by rent, Swallow Hotels. In Titan 2006-5 they had pointed to the weak past performance of the Hotel Balneario and limited experiences of the operator in the hotel sector."

Citigroup has warned that while AAA noteholders are typically well protected, the ratings actions highlight that investors in subordinate notes are buying the property/cash flow risk. "This may not be accurately reflected in some recent BBB and BBB- spreads.. There seems to be some negative features investors should look out for, such as single unrated operators with little experience in the sector."

The European Hotel market remains a small piece of the CMBS pie to date, although Citigroup has said it foresees further issuance given the "overall (good) performance" of the sector.