Call for Innovation in European CMBS Workout Strategies

London, 8 December 2010 – CB Richard Ellis (CBRE) Real Estate Finance warns that restructuring strategies for commercial mortgage-backed securities (CMBS) workouts that are reliant on loan extensions are likely to fall under increased scrutiny from senior noteholders. CBRE REF highlights that alternative solutions will need to be presented by loan servicers to noteholders as they become reluctant to take on increased extension risk, especially when these can present limited visibility on recoveries.

CBRE REF also believes that restructuring strategies that rely on continued capital growth recovery and do not match the needs of the underlying real estate to repay creditors are high risk and could lead to greater future losses. If an extension does not maximize the value of the asset, it is unlikely to maximise recoveries for lenders. Therefore loan servicers will need to present innovative workout solutions incorporating active management of the underlying assets. The traditional choice between enforcing security and liquidating the CMBS loan and restructuring the debt will need to be widened to address these concerns.

Commenting on the requirement for a change in approach, Paul Lewis, Director of CBRE REF’s Special Servicing team, said: “Given the range of different assets and loan and intercreditor structures that exist, it is clear that there is, and should not be, an ‘off the peg’ solution to CMBS workouts and servicers are the only party within CMBS structures who have the discretionary powers and armoury of tools to make this happen. In 2011, we expect to see greater investor lobbying for repayment of principal and to achieve this a renewed focus on active asset management strategies to sweat out value must be introduced. In addition, we expect to see more enforcements of loans for prime, good quality assets to bring them under the control of the creditors while loan restructurings for secondary assets should fulfil the objective of bringing in capital and expertise without the need for fire sales.”

Seeking CMBS workout solutions will nevertheless remain challenging as loan servicers try to keep a multitude of bondholders in different tranches and with conflicting priorities happy. The sheer number of CMBS of maturities that are due to occur - €21 billion of the total outstanding €73 billion loans in the sector will mature next year - suggests that 2011 is going to be a year of new approaches, and that workouts must unify structured finance and asset management expertise to maximize returns for investors. Loan servicers will need to take the lead in developing more innovative solutions that do not rely on a default position or recoveries generated by market forces alone.