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European CMBS Market Sees Spate of Downgrades
Asset Securitization Report--SourceMedia (November 24, 2008)

Nora Colomer

Moody's Investors Service's recent lowering of Ambac and MBIAs' ratings to 'Baa1' spurred a massive flow of downgrades.

The European CMBS sector has been especially hard hit. It saw downgrades from all three rating agencies over the past week.

In terms of rating performance, in 3Q08, Moody's downgraded seven tranches in four EMEA CMBS transactions, and didn't upgrade a single tranche. All but one of the downgrades were a result of transaction underperformance. The rating agency said that a total of 32 downgrades stemmed from the monoline downgrade.

Over 3Q08, Moody's also placed 71 classes of notes on review for possible downgrade, which affected 26 deals. For 36 of the affected classes of notes in eleven transactions, the review for downgrade was linked to Lehman Brothers' insolvency and subsequent ratings downgrades.

Moody's put the class D notes of Deco 14 on review for possible downgrade, due to the poor performance of the Arcadia loan, which is in payment default. Class D is the most junior tranche rated by Moody's; the Deco 14 deal includes classes down to G.

Fitch Ratings downgraded the class C, D and E tranches of REC V after receiving an updated valuation that shows that the whole loan-to-value ratio is 99.5% and the securitized portion stands at 93.9%.

Standard & Poor's also lowered its ratings on the class D and C notes of Eclipse 2007-2, due to a deteriorating outlook for several loans in the pool. The class F and G notes of Eclipse 2006-2 were placed on creditwatch negative by the agency. The class A notes of Epic Industrious were downgraded to 'Aa2' from 'Aaa' by Moody's, as a result of the increased risk of losses since the transaction closed.

"There are a variety of specific reasons for these [ratings] changes: after all, the European CMBS sector contains a lot of different types of structures with different underlying businesses," said Jean David Cirotteau, a Societe Generale analyst. "Problems are linked to the current economic turmoil, but to various degrees. Although these actions are hitting the market now, the CMBS market has not recently deteriorated. Indeed, various transactions have been experiencing financial stress for several weeks or months now."

At the end of October, Barclays Capital analysts wrote in a research note that three-quarters of European CMBS deals they monitored include loans that are in default, breach lending terms, or have other "credit issues." The analysts identified 268 loans in 60 securitization transactions with credit concerns that "should be monitored closely." They analyzed 80 CMBS transactions, representing 60% of the European CMBS market.

The number of loan defaults in total has more than doubled between the end of May, when it stood at nine, and Oct. 20, according to Barclays analysts. Of the current defaults, seven were caused by non-payment of interest or principal, compared with just one at the end of May. In another seven cases, the cause of the default was the breach of a loan-to-value, interest cover, or debt service cover ratio. Aside from the 20 loans in default, 64 carry refinancing risk because they mature between 2008 and 2010. Only a quarter of these have loan-to-value ratios below 70%, and therefore may not face significant difficulty in refinancing.

Going forward, Moody's said it anticipated a further increase in the number of loans and transactions facing adverse issues. Certain transaction types will be more exposed than others to loan-performance related rating sensitivity. For example, deals that depend on loan refinancing in the next couple of years, as well as those which include higher-than-average LTV loans and/or are geographically concentrated in certain regions/sectors. Transactions exposed to possible rating downgrades also include those with short lease profiles, and/or those that might be sensitive to counterparty rating changes as a result of the current market turmoil.

"In light of the sharp correction taking place in various key EMEA CMBS real estate markets, and with the weakening of certain occupational markets, the increased likelihood of tenant defaults, and the limited availability of property financing sources, we expect that the rating impact of adverse transaction performance will not be constrained to the most junior notes. In certain cases the senior notes might be subject to negative rating migration," said Deniz Yegenaga, an associate analyst at Moody's.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.



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