The Blubber

Investors in several European commercial mortgage bonds that were originally sold with top credit ratings look set to suffer losses, the first time since the global financial crisis that the safest tier of this debt has been hit.

Investors in several European commercial mortgage bonds, originally sold with top credit ratings, are likely to face losses, analysts say. This marks the first time since the global financial crisis that the safest tier of this debt has been affected.

Among those facing losses are holders of the most senior bonds in a commercial mortgage-backed security (CMBS) that financed three UK shopping centres for Oaktree Capital Management. The recently agreed sale of these properties is expected to raise less than the outstanding debt.

Additionally, rating agency Fitch has predicted losses for investors in the safest tranche of two other CMBS deals, including one involving Brookfield.

“Certainly as an investor you wouldn’t expect to see losses at triple-A level, it’s not a good headline,” said Elena Rinaldi, a portfolio manager in the asset-backed securities team at TwentyFour Asset Management.

Rising borrowing costs over the past two years have led to the worst downturn in commercial real estate since the 2008 global financial crisis, with the value of offices, retail, and other assets dropping by 20-30% from their 2022 peak in Europe.

Today's more conservative borrowing levels compared to pre-2008 have delayed signs of distress among property investors. However, the latest loss predictions show that the strain in the property markets is now impacting even the most protected tier of real estate-backed credit investments.

The loan was transferred to Mount Street, a “special servicer” aiming to maximize recovery for investors, in 2020 after breaching covenants and has been in default since then.

Elizabeth Finance 2018 DAC, the CMBS vehicle that issued the debt, announced last week that Mount Street had accepted a £35 million bid for the shopping centres in King’s Lynn, Dunfermline, and Loughborough, known as the Maroon properties. The bid would provide net proceeds of about £31.5 million to debt investors.

Holders of the most senior bonds are owed £33.6 million, according to Bank of America, and under this proposal are set to incur a 6.3% loss.

“The biggest problem has been interest rates, quite simply,” said James Bannister, head of special servicing at Mount Street. “There’s no money left to do anything with the assets so we had to be honest with investors and say, ‘we can’t do any more, now is the time to move these assets on’.”