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European CMBS Refinance Risk Part I: Storing Up Trouble For The Future
Standard & Poors, June 2006
Standard and Poors RatingsXpress Credit Research provides in-depth coverage of international corporates, financial institutions, insurance companies, utilities, sovereigns and structured finance programs. RatingsXpress Credit Research lets users determine the credit rating of holdings and identify key factors underlying an issuer's creditworthiness, distinguishes the different risk exposures for new and existing deals, and provides an understanding of how their analysts interpret key regulatory, political and environmental events and their economic impact.
Research Type: Commentary
Criteria articles describe the thought process and methodology Standard & Poor's analysts use in determining ratings. These commentary pieces discuss both the quantitative (economic and financial) and qualitative (business analysis and caliber of management) aspects of the analysis, as well as legal issues.
Abstract
Rating refinance risk in European CMBS transactions is becoming increasingly problematic. The chief concern when analyzing this risk is that exit yields on debt might be inadequate if capitalization (cap) rates or interest rates rise. Real estate lending in Europe is characterized by short-term loans with limited term amortization and a significant proportion of the debt due for repayment at the loan's maturity, a so-called bullet loan. The key risk at loan maturity is whether there is enough value in the properties to allow the borrower to refinance at, or above, the amount of debt that is maturing, and whether there is sufficient cash flow to service this debt at potentially higher interest rates. One of the most significant trends...
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