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European CMBS: Assessing The Liquidity Risks Caused By COVID-19

European CMBS: Assessing The Liquidity Risks Caused By COVID-19


The global outbreak of COVID-19 has caused a high degree of uncertainty in the European commercial real estate markets. These developments have potential implications on the ability of a European commercial mortgage-backed securities (CMBS) transaction to pay timely interest on its classes of notes. However, many transactions benefit from some form of liquidity support, which mitigates the risk of temporary interest shortfalls.

So far, no European CMBS transaction rated by S&P Global Ratings has suffered an interest shortfall or a draw on its liquidity facility or reserves due to COVID-19 disruption. However, we believe that certain underlying commercial real estate sectors are more exposed to liquidity risks than others (see "European CMBS: Assessing The Credit Effects Of COVID-19," published on March 24, 2020). In this report, we take a closer look at how these sectors have fared since the beginning of the COVID-19 outbreak.

Table 1 includes all transactions that we rate, excluding credit-linked transactions and those where the highest rating is in the 'CCC' category or below. The table shows the liquidity coverage available for each transaction, which enables us to assess which classes of notes are most susceptible to interest shortfalls.

If an interest shortfall were to occur, we may not necessarily lower our ratings on the affected class of notes. We would use both quantitative and qualitative factors to assess whether those interest shortfalls were likely to be permanent or temporary and the likely duration of the outstanding shortfall. We would only adjust the ratings if we believe that full interest repayment is likely to exceed its rating-specific time horizon. (For more detail on how we treat interest shortfalls, see "A Deeper Dive Into The Potential Credit Effects Of COVID-19 On European CMBS," published on April 2, 2020.)

Many loans in European CMBS transactions include mechanisms to trap excess cash upon breach of pre-set debt yield, interest and/or debt service coverage tests. Sometimes, breaches of further tests can even lead to a loan default. These tests are designed to give the servicers and special servicers an opportunity to intervene early when property performance gradually declines. However, in the current environment, where loans suffer from a sudden, sometimes complete, loss of cash flow, there will often be times when there is no cash available to trap.

When a breach of these tests causes a loan to default, servicers typically can exercise their discretion and waive the test to stop the loan from defaulting. From past experience, servicers often refrain from declaring a loan in default in these cases in exchange for concessions from the borrower and its sponsor. This can include an equity injection or an obligation to de-lever the loan when income returns. There is also little upside for servicers to call a default because it is challenging under current market conditions to maximize recoveries from a loan through enforcement of the security and sale of the assets.

Many loans also include loan-to-value (LTV) tests with similar consequences to those described above. While a cash flow-based test can be performed regularly, because borrowers report income and expenses to lenders on an ongoing basis, these LTV tests are only carried out if a third party performs a new property valuation, which in the case of CMBS 2.0 post-crisis deals are typically required annually. However, given the current difficulties valuers are facing because of a lack of market comparables and an inability to undertake property inspections, it would be unsurprising if this requirement were waived. As a result, LTV thresholds might not be tested for many CMBS loans in the near future. (For more details on how we view these covenant tests, please refer to "A Closer Look At How We Treat Financial Covenants In European CMBS," published on Nov. 13, 2018.)

Table 1

Available Liquidity Coverage For Rated European CMBS Transactions
Transaction name Highest rating Property type Deal size Liquidity/reserve size Liquidity facility (% of deal) Data as of Classes covered Any existing liquidity facility drawings or note shortfalls Sponsor
Broadgate Financing PLC AAA (sf) Office 1,225,433,500 92,187,000 7.5 Apr-20 All classes covered None British Land
Canary Wharf Finance II PLC A+ (sf) Office 1,436,200,000 300,000,000 20.9 Jan-20 All classes; 70% available for class B and B3, 65% available for class C2, 10% available for D2 None Canary Wharf Group
Cold Finance 2019 PLC AAA (sf) Logistics 268,600,000 13,000,000 4.8 Feb-20 All rated classes; 20% available for class E notes None Lineage Logistics
Debussy DTC PLC B- (sf) Retail



13.3 Apr-20 All rated classes covered £32.6 million drawn to date includes £22.3 million from reserve and £10.3 million from disposals account. Toys R Us
Deco 2014-Tulip Ltd. AAA (sf) Office 21,488,828 2,405,939 11.2 Jan-20 All classes covered None Mount Kellett, Sectie5
Deco 2019-RAM DAC AAA (sf) Retail 142,500,000 4,996,844 3.5 Feb-20 All classes covered None Intu & Cale Street
Elizabeth Finance 2018 DAC AA+ (sf) Retail 86,935,466 4,951,804 5.7 Apr-20 All classes except class E None Multiple
Eos (European Loan Conduit No. 35) AAA (sf) Mixed 214,242,483 10,744,992 5.0 Apr-20 All classes covered None M7
Helios (European Loan Conduit No. 37) DAC AAA (sf) Hotel 332,500,000 15,485,000 4.7 Dec-19 All classes except class E None Titan Investment Ltd.
Intu (SGS) Finance PLC A (sf) Retail 1,150,000,000 Springing liquidity commitment N/A Mar-20 All classes covered. Intu are required to put in-place liquidity support equal to six months interest payments (by June 2020) None Intu
Intu Metrocentre Finance PLC BBB+ (sf) Retail 485,000,000 20,000,000 4.1 Dec-19 All classes covered None Intu
Kanaal CMBS Finance DAC AAA (sf) Mixed 250,228,726 11,686,652 4.7 Feb-20 All classes covered None Multiple
Kantoor Finance 2018 Designated Activity Company AAA (sf) Office 229,262,108 13,228,533 5.8 Feb-20 All classes covered except class E None PPF Group, Aventicum Capital Management
Land Securities Capital Markets PLC AA (sf) Mixed


Springing liquidity commitment N/A Sep-19 All classes covered (however none is required under the current covenant testing thresholds) None Landsec
Libra (European Loan Conduit No. 31) Designated Activity Company AAA (sf) Mixed 212,750,521 9,607,001 4.5 Jan-20 All classes except class E None MStar Europe
Longstone Finance PLC A+ (sf) Retail 615,179,810 86,000,000 14.0 Apr-20 All classes covered; 60% available for class B and 50% available for class C None Sainsbury's
Magenta 2020 PLC AAA (sf) Hotel 265,645,738


3.1 Mar-20 All classes except classes D and E None DTGO Corp. Ltd.
Meadowhall Finance PLC AAA (sf) Retail 716,635,740 75,000,000 10.5 Apr-20 All classes covered but junior classes capped None British Land / Norges Bank
Oranje (European Loan Conduit No. 32) DAC AAA (sf) Mixed 169,327,185 7,348,077 4.3 Feb-20 All classes except class E None Multiple
Patrimonio Uno CMBS S.r.l. BB+ (sf) Office 35,941,142 4,065,454 11.3 Dec-19 All classes covered. Limits on drawings for junior classes. None Patrimonio Uno
Pembroke Property Finance DAC AAA (sf) Mixed 193,325,970 5,065,388 2.6 Dec-19 Class A only until fully redeemed. Then available for next senior class. None Multiple
Premiertel PLC AA (sf) Office 239,854,702 16,000,000 6.7 Feb-20 All classes covered None Rotch Property Group Ltd.
Ribbon Finance 2018 PLC AAA (sf) Hotel 366,160,285 22,762,677 6.2 Apr-20 All classes covered (classes F and G no more than 20% of commitment) None Amir Dayan
Salus (European Loan Conduit No. 33) DAC AAA (sf) Office 349,130,000 19,000,000 5.4 Jan-20 All classes covered None Brookfield
Sandwell Commercial Finance No. 2 PLC BB+ (sf) Mixed 37,027,301 2,800,000 7.6 Mar-20 All classes covered None Multiple
Scorpio (European Loan Conduit No. 34) DAC AAA (sf) Logistics 234,961,696 10,398,305 4.4 Feb-20 All classes except class E None Blackstone
STUDENT FINANCE PLC BBB (sf) Student housing 215,000,000 3,900,000 1.8 Dec-19 All classes covered None Brookfield
Taurus 2018-2 UK DAC AAA (sf) Office/CoWorking 261,608,000 13,000,000 5.0 Feb-20 All classes covered None Nuveen (45%) / PFA pension (45%) / WeWork (10%)
Taurus 2019-3 UK DAC AAA (sf) Student housing



3.1 Mar-20 All classes except classes D and E None Brookfield
Taurus 2019-4 FIN DAC AAA (sf) Mixed 194,060,000 6,412,500 3.3 Feb-20 All classes except classes D and E None Sponda/Blackstone
Taurus CMBS (U.K.) 2006-2 PLC B+ (sf) Office 102,510,773 9,660,812 9.4 Jan-20 All classes covered None Mapeley
Telereal Securitisation PLC AA (sf) Mixed 3,089,818,808 288,000,000 9.3 Dec-19 All classes covered None Telereal Trillium
Trafford Centre Finance Ltd. (The) AA+ (sf) Retail 691,077,886 80,000,000 11.6 Dec-19 All classes covered but junior notes are limited to £15 million None Intu
UNITE (USAF) II PLC A (sf) Student housing 749,820,635 14,910,000 2.0 Mar-20 All classes covered None Unite
Westfield Stratford City Finance No.2 PLC AAA (sf) Retail 750,000,000 13,820,000 1.8 Nov-19 All classes covered None Unibail-Rodamco-Westfield, Algemene Pensioen Groep N.V., Canadian Pension Plan Investment Board

Hotel Sector Slashes Costs In A Bid To Retain Cash

The hotel sector continues to face unprecedented headwinds on a global scale. There does not yet appear to be a consensus on when business travel and tourism will re-emerge in any of the major European countries. In the meantime, operators are scrambling to cut costs in any way possible to preserve cash, including reducing staff costs, canceling marketing initiatives, and postponing any non-essential capital expenditure (capex) projects. Nevertheless, hotel portfolios remain likely to generate little to no income in the short term. We therefore placed our ratings on three classes of notes across two hotel transactions on CreditWatch negative, where liquidity support is not present. (See "Magenta 2020's Class D And E U.K. CMBS Notes Placed On CreditWatch Negative Due To COVID-19 Related Liquidity Stress," and "Helios (European Loan Conduit No. 37)'s Class E Notes Placed On CreditWatch Negative Due To Stress From COVID-19," both published on April 7, 2020.)

Recently published special notices provide some insight into what transaction parties are doing to cope with the situation. Alongside the measures described above and that the U.K. government has temporarily canceled business rates, it appears that a large number of hotels have been contracted out to government or charitable institutions. Helios (European Loan Conduit No.37) DAC, for example, announced that this was the case for almost half the properties in their portfolio of 49 U.K. hotels. It has not been reported, however, how much revenue the borrower is able to generate from these contracts and what their property operating costs are.

When travel restrictions are lifted further down the line, there is likely to be some pent-up demand for both business travel and tourism, which could help hotel operators recuperate at least some lost income. Research from U.K. real estate consultancy Knight Frank estimates that major cities--such as London--will see a full market recovery by the second half of next year, although this assumes the reopening of the market by the end of Q2 2020.

It remains to be seen whether the virus outbreak will have a long-term impact on the hotel industry. Many expect tourism to rebound to previous levels at some stage; it is just a question of when. Business travel is less certain, with some believing that COVID-19 could accelerate many corporations' compliance with new environmental, social, and governance (ESG) mandates and objectives to reduce their carbon footprint. On the other hand, though holidaymakers may have already canceled their vacations for later in the year, business travel is often booked at shorter notice and may recover quicker. In any case, it is too early to tell what the long-term implications may be and we have not yet seen enough evidence to suggest that we should revise any of our current assumptions.

Uncertainty Prevails In The Student Accommodation Sector

There is still a huge amount of uncertainty in this sector. For the larger operators, which is where our CMBS exposure lies, many have offered refunds to students wishing to cancel their accommodation for the summer term. In terms of take-up of this offer, Unite, the largest U.K. operator, has reported that rent will be lost on approximately 65% of its total beds for the summer term, with the remaining beds still being occupied, either by students or under nomination or lease agreements with universities. To mitigate the effects of cash flow loss, operators are implementing cost savings along with the deferral of non-essential operational capex.

The effect on the lease-up for the 2020/2021 academic year is still unknown, given that social distancing measures are still in place and there is no exact timeline as to when and in what format universities can re-open. At the same time, universities' finances are increasingly under strain. Some are at risk of financial failure, which has resulted in this sector requesting a £2 billion bailout from the U.K. government.

However, the top U.K. student accommodation providers still report that to date, reservations for the 2020/2021 academic year are roughly in line with the same time last year. This is surprising, although this demand includes some nominations/lease agreements with universities. In addition, some providers give the option to cancel a booking in a few months' time, with only the booking fee being nonrefundable.

Given the continuing uncertainty, it is difficult to predict how and if COVID-19 disruption will change our long-term view on occupancy or rental levels for this sector. In the short term, however, it increasingly seems that the larger operators/sponsors are in a better position to cushion the liquidity stress in their transactions.

Retail Tenants Pressure Landlords to Reduce Rents

Several challenges have caused a broad-based decline in physical retail performance and revenues in recent years. These have included the rise of e-commerce competition and rapidly evolving consumer habits, as well as other well-recognized headwinds such as a continuation of company voluntary arrangement (CVAs) and administrations, affecting achievable rental levels and occupational demand.

The effects of COVID-19 have only exacerbated these issues and continue to present a major threat to retail property owners, as the closures of shopping centers and social isolation requirements are significantly denting their tenants' revenues. The ongoing spread of COVID-19 has put acute pressure on retailers and the longer-term effect on rents will depend on the pandemic's duration and the government measures.

On the continent, shopping center landlords' exposure to variable rents remains moderate, at about 5% of their gross rent on average. Still, such rents will likely suffer from retailers' depressed turnover. More importantly, tenants are pressuring landlords to reduce their fixed rents or temporarily discount or defer their rents as the pandemic persists. This is especially in light of the temporary closures of shopping centers, social isolation requirements, and other governmental measures, such as rent-freeze allowances.

With retailers unable to generate any meaningful revenue, and the increasing number of rent holidays and deferrals being agreed, landlords are suffering from diminished revenues, which is inevitably increasing the pressure on their financial obligations to debt providers.

In the context of our CMBS ratings, we continue to expect that servicers will collaborate with sponsors to ensure that underlying loans keep performing in the short to medium term. We understand that servicers recognize that, given the current situation, there is little to be gained from entering into an enforcement or fire sale scenario, and the focus will largely be on the shorter-term flexibility of loan covenants and the monitoring of interest payment pressures.

We are continuing to monitor property-specific and market data as it becomes available to assess our longer-term recovery projections for retail properties backing our rated European CMBS transactions. While we expect to see operational performance significantly decline in the short term as a direct result of the effects of COVID-19, we are seeking to understand the extent to which the sector and individual properties will recover, without losing sight of the ongoing structural changes the physical retail sector was already undergoing. We may consider adjusting our assumptions for vacancy rates and rents if we believe that they will not recover to our previously assumed levels over the long term.

Office and Logistics Sectors Could Weather The Storm

Rental arrears have not been a problem unique to the retail sector, with landlords of office and logistics properties also suffering from lower cash collections in the midst of the pandemic.

Nevertheless, with declining GDP, it is likely that vacancy rates will increase in some office submarkets. On the other hand, due to recently fast growing demand, many office and logistic markets have been characterized by supply constraints and historically low vacancy rates. Moreover, speculative office space construction has been comparatively limited, given the lessons learned from the previous downturn. Therefore, we still expect most office and logistics backed CMBS transactions will be able to weather the storm in the short term.

Related Research

  • Coronavirus Impact: Key Takeaways From Our Articles, April 30, 2020
  • Credit Conditions In Europe Darken As Costs Of Lockdowns Add Up, April 27, 2020
  • EU Response To COVID-19 Can Chart A Path To Sustainable Growth, April 22, 2020
  • Magenta 2020's Class D And E U.K. CMBS Notes Placed On CreditWatch Negative Due To COVID-19 Related Liquidity Stress, April 7, 2020
  • Helios (European Loan Conduit No. 37)'s Class E Notes Placed On CreditWatch Negative Due To Stress From COVID-19, April 7, 2020
  • Credit FAQ: A Deeper Dive Into The Potential Credit Effects Of COVID-19 On European CMBS, April 2, 2020
  • COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, March 26, 2020
  • European Corporate Securitizations: Assessing The Credit Effects Of COVID-19, March 26, 2020
  • European CMBS: Assessing The Credit Effects Of COVID-19, March 24, 2020
  • A Closer Look At How We Treat Financial Covenants In European CMBS, Nov. 13, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Amisha Unnadkat, London + 44 20 7176 3826;
Secondary Contacts:Mathias Herzog, Frankfurt (49) 69-33-999-112;
Edward C Twort, London (44) 20-7176-3992;
Carenn K Chu, London (44) 20-7176-3854;
Oliver Thomas, London + 44 20 7176 8589;
Carla N Powell, London (44) 20-7176-3982;

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