CMBS Make U.S. Comeback But Still Dormant in Europe

OCT 29, 2012 4:26pm ET

Commercial mortgage-backed security issuance has re-emerged in the United States but remained relative dormant in the European region, according to a recent Fitch report.
When asked why the difference exists and whether it is likely to change, Huxley Somerville, head of U.S. CMBS for Fitch, noted that one contributing disparity is that the influential United Kingdom market in EMEA had shifted in the decades leading up to the credit crisis toward floating-rate loans.
“The U.S. has a long standing fixed-rate lender base that relies less on floating-rate loans, whereas the U.K. had an earlier tradition of institutional fixed lending on longer terms that gave way to shorter term floating rate bank dominance in recent decades until the credit crisis,” he said.
“The banking crisis has forced European banks into retreat, making way for asset managers and other institutional investors such as insurance companies to size up alternative assets, such as commercial mortgages, as a way of beating low yields offered elsewhere,” added Euan Gatfield, head of Europe, Middle East and Africa CMBS for Fitch.
“We expect Europe to converge toward the U.S., but it will be a long, drawn-out affair,” he said.
When asked if performance is comparable by vintage, Gatfield said, “Vintage performance in both regions is very similar, with pre-2005 vintages performing very well. Later pre-crisis loans have dragged down performance in both Europe and the U.S.”
The report on the differences between the two markets notes that the CMBS issuance in the U.S. that first re-emerged in 2011 is still a far cry from what was seen at the market’s peak in 2006 and 2007, but it is more active than the European market.
Yet, according to a separate report on global structured finance losses, European CMBS performance-while somewhat similar-is if anything a little better than that seen in the U.S. market. The report shows total losses on U.S. CMBS are pegged at 5.4%, as compared to 3.4% on EMEA CMBS.
(Interestingly, EMEA RMBS markets more markedly outperform U.S. RMBS. According to the Fitch report, with the EMEA losses of 0.2% primarily stemming from nonconforming deals originated in Spain and the United Kingdom. No losses are projected on the main U.K. and Dutch prime sectors.)
Overall, CMBS represent 10% of global structured finance losses. In comparison, U.S. residential MBS loans represent 57.4% of global structured finance losses even though that sector represented just 28.3% of issuance.
Fitch said most CMBS losses have not yet fully manifested. Term defaults account for 0.9% of realized losses and another 4.5% are expected to be written off due to maturity defaults of loans originated during the peak period of loose underwriting. Mitigating this to some extent is special servicers’ flexibility to extend or restructure loans.
Losses are, not surprisingly, highest for loans from 2006-2007, when underwriting was at its weakest, with the losses dominated by CMBS and RMBS. Almost all (99.7%) of Fitch’s loss estimates of $430 billion on all U.S. structured finance transactions is attributed to transactions issued before 2008, even though they represent only 78.2% of issuance.

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