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A dark hour for CMBS

September 11, 2009

The last week has been a bit of a shocker for Europe’s already crumbling commercial mortgage-backed securities market (CMBS).
Investors have had to cope with steep declines in the value of their bonds and a wave of downgrades by rating agencies.

Now, to add insult to injury, there has been a jump in legal and structural issues. Bondholders are having their rights diluted over or taking on fresh liabilities they didn’t even realise they had.

In France a judge this week sided against bondholders who wanted to take control of a Paris-office skyscraper formerly owned by a Lehman Brothers unit. The loan defaulted earlier this year, but a Paris judge approved a safeguard plan proposed by its owners, which include Lehman’s receivers Pricewaterhouse Coopers. Creditors argue that the ruling risks damaging property investment in France.

And in the UK there is the never-ending saga of White Tower 2006-3. This portfolio of elegant city offices was once the property empire of billionaire Simon Halabi, who refinanced them with a CMBS arranged by Soc Gen.

Now the loan has defaulted and the properties are the playthings of a handful of frustrated bondholders and, all of a sudden, the UK tax authorities, which have slapped the companies that own the properties with a withholding tax charge. FT’s Alphaville tells the story here

This is all bad, but the worst is probably still to come for bondholders. The highly levered nature of many property loans refinanced during the boom years will likely lead to a truly ghastly default rate as loans mature and can’t be refinanced. The only thing that could save the market is a speedy recovery in commercial real estate and revival in bank lending, hardly a likely prospect.  The return of any kind of CMBS market in Europe looks further away than ever.

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