The risk that securitized commercial mortgages from the years of loose underwriting will have trouble refinancing at maturity is largely said to have not materialized to date in the United States, at least not to the extent feared. But a report last week indicates it is still an outstanding risk both domestically and internationally.
The report by Fitch Ratings looks more broadly at the risk across structured finance and covered bonds globally and finds commercial mortgage-backed securities are among the areas where it is the greatest.
According to the report, the concern is most urgent in Japan, followed by Europe and the United States, with these three regions being the largest CMBS markets in the world.
Although some loans with relatively shorter maturities in the U.S. CMBS market have been maturing, Fitch notes there are 10-year terms “in most deals.” This means CMBS from the 2005-2007 period when U.S. underwriting loosened will hit the wall in 2015 through 2017.
The U.S. market may have improved by then and, indeed, Fitch notes that “unlike Japan and Europe” it has already seen some revival, “albeit unevenly and at low levels compared to precrisis.”
Ultimately, the ratings agency said, “Prospects for longer-term financing for U.S. CMBS are…difficult to predict.” Generally its report indicates prospects look best for higher-quality properties that can find funding outside the CMBS market. But there continues to be concern surrounding those “secondary and tertiary markets” that rely more heavily on CMBS financing.
So far, “refinancing risk associated with a diminished tail period has not had a significant impact upon U.S. CMBS ratings,” Fitch said.
But the ratings agency notes that if there were “an extended illiquid refinancing market” in the United States then “non-investment grade classes could face further downgrades, given their greater vulnerability to changes in prevailing conditions.” Fitch said it expects investment-grade bonds, on the other hand, would “mostly remain stable.”
In other news about post-crisis U.S. developments that have parallels in international markets: Lucent Capital managing director Farzin Emrani and associate Asael Chavez told this publication that the recent sale the company arranged of a portfolio of nonperforming construction loans secured by partially complete single-family residential developments and condominiums in Mexico is a sign that there has been a relative pickup in distressed asset secondary market sales in that country.
Somewhat like in the United States, financial institutions are starting to be relatively more active when it comes to working through portfolios of distressed residential assets in Mexico, they said. U.S. private equity firms are selectively looking to invest again in such assets, the company noted.
The total unpaid principal balance of the portfolio sale Lucent arranged was approximately 700 million Mexican pesos or $56 million. The assets were located in many diverse states, with the largest concentration in Baja California.
There were 71 loans in the portfolio. The purchase price was undisclosed.
The company said it worked exclusively on behalf of the seller, a bank trustee, and spent six weeks marketing the portfolio to U.S., Mexican and other international investors. Lucent also indicated this was the first of three loan sale assignments it has been engaged to sell in Mexico.
