Corporate borrowers under pressure as uncertainties over mortgage-backed securities grow

Borrowers are under huge strain to navigate the complications of commercial mortgage-backed securities (CMBS) structures when putting forward requests or restructuring proposals, warned a senior legal expert at the IMN European Distressed Real Estate Forum in London today (25 March 2010).

“In the early days of 2006-2007, many borrowers were lured by attractive rates, very high leverage and underlying assets that seem to be continually increasing in value, according to Eleanor Hunwicks, a finance partner at leading City law firm Berwin Leighton Paisner LLP.

“However, that world has changed and borrowers face numerous complications when approaching servicers for loan extensions, debt service holidays or capital expenditure funds in order to attract tenants to vacant space in buildings where lease expiries are increasingly becoming an issue.” Eleanor Hunwicks said.

“The harsh reality is that values have fallen greatly, even in cases where the underlying property is still performing, and the loan to value may be well in excess of 100%.

Eleanor Hunwicks also said that the refinancing problem facing borrowers is set to continue and “will only get worse as CMBS maturities peak in 2012”. She also highlighted the lack of standardisation of “vast and complex documentation involved in CMBS structures” as a potential barrier to borrowers putting forward requests or restructuring proposals.

She continued: “When and in what form the CMBS market will return is a matter of some debate, but, aside from questionable lending practices, borrowers must be better educated as to how the structures can be inflexible, and may not suit business plans as economic circumstances change. Whether this will happen in practice is of course another question.”

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