GBP2.4 Billion Of Loans Under Threat From Declining Property Values

Fri, 18 Jan 2008

Securitised loans worth £2.4 billion could go into default due to the fall in UK property values, according to credit rating agency Fitch.

The agency has warned that its rating on four commercial mortgage backed security (CMBS) transactions it had rated have been changed to ‘negative’, including UK property as collateral.

The four CMBS transactions, issued by Morgan Stanley, Lehman Brothers, Deutsche Bank and a consortium of Credit Suisse and Capmark, were all made in 2006 and early 2007, when values were at their highest.

Fitch said that the drop in values could result in the CMBS loans not being refinanced once the loans have matured, which is expected before 2011.

The CMBS loans were vital in driving the recent UK property run, because they allowed some banks to move loans off their balance sheets – therefore being able to lend more money at cheaper terms.

Rodney Pelletier, managing director at Fitch's structured finance team, commented: "Although rental income from current tenants is generally stable, the main concern currently is that property capital values may be insufficient to allow final principal repayments at loan maturity."

"Most CMBS transactions rely heavily on the sale or refinancing of the charged assets - in most cases commercial property - for repayment of its debt . As values fall, the likelihood that a sale or refinancing will deliver sufficient funds to make such a principal payment reduces," he added.

Fitch revealed the loans at risk account for only 11 per cent of the loans it rated in 2006 and 2007, while the segments of debt at risk account for just 2.2 per cent of the total securitised.
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