KBRA UK Releases Research – CMBS LTV Covenant Breach Risk on the Rise

LONDON, October 03, 2022--(BUSINESS WIRE)--KBRA UK (KBRA) releases research highlighting the potential impact rising yields may have on European CMBS loan-to-values (LTV). As central banks increase interest rates to curb inflation, property yields (capitalisation rates) are expected to widen, which could lead to asset value declines. The underlying collateral in most CMBS transactions will be revalued over the next 12 months, with some loans to require refinancing. While potential yield widening could be partly offset by rental growth, some CMBS transactions will be vulnerable to reductions in property values. A decline in property value would lead to higher LTV ratios and, depending on the LTV covenants, could result in cash-trap breaches and/or loan defaults, as well as increased refinancing risk.

In the report, KBRA reviewed 26 European loans across 24 CMBS 2.0 transactions and calculated stressed LTV scenarios to determine whether they were at risk of breaching LTV covenants.

Key Takeaways

  • A 100-bp rise in capitalisation rates would equate to 16 loans rising above a 65% LTV ratio, including two above 80%, which increases refinance risk. Further, a 200-bp capitalisation rate increase results in 21 loans reaching above a 65% LTV ratio, 13 of which are above 80%.

  • When reviewing LTV stress outcomes versus the individual loan’s LTV covenants, one-half (13) of the loans in KBRA’s sample pool will pierce LTV cash trap triggers, while one loan will default in a scenario where capitalisation rates increase by 100 bps. The number meaningfully increases when capitalisation rates rise by 200 bps, where cash-trap trigger breaches climb to nearly three-quarters (19) of the loans and seven loans default.

  • Loans with higher LTVs and lower capitalisation rates, such as those secured by multifamily and industrial properties, are more vulnerable to capitalisation rate increases.

  • Older vintages that have been able to deleverage were at an advantage compared to newer vintages, which are predominately at higher LTVs and still in the early stages of implementing business plans and deleveraging efforts.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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Stacy Gross, Associate Director
+44 20 8148 1058

Stephen Hughes, Director
+44 20 8148 1004

Caitlin Parrella, CFA, Director
+44 20 8148 1095

Yee Cent Wong, Co-Head of Europe
+353 1 588 1260

Business Development

Mauricio Noé, Co-Head of Europe
+44 20 8148 1010

Miten Amin, Managing Director
+44 20 8148 1002