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Commercial Mortgage Defaults to Increase in Europe, Moody’s Says

Defaults or restructurings of European commercial mortgages will increase in 2012 as lenders limit funding to transactions backed by prime assets and low loan-to-value ratios, according to Moody’s Investors Service.

About 15 billion euros ($20 billion) of loans included in asset-backed bonds are maturing next year and about 20 billion euros of debt comes due in 2013, London-based analysts including Oliver Moldenhauer and Christophe de Noaillat wrote in a report today. Most borrowers will struggle to repay the loans, which are mainly backed by non-prime properties.

“We expect an increase in defaults and/or restructurings in 2012,” the analysts wrote. “The limited availability of refinancing for maturing loans will be the key threat to the performance, and hence credit quality.”

Borrowers of loans backed by offices, warehouses and other commercial properties face a funding gap of about 90 billion euros over the next three years, according to Moody’s estimates. Available lending won’t “materially increase” next year as banks reduce assets to comply with new capital rules.

Administrators of the loans, known as servicers, are likely to extend maturities to avoid losses where asset values have declined, Moody’s said. Forced sales would be used mainly when cash flows don’t cover loan payments.

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