Crisis Still Reverberating in Credit Suisse Real-Estate Bonds

  • CMBS sold before 2008 still accumulating losses in Europe
  • Losses on Credit Suisse deals total 1.2 billion euros

Chances are that if you bought bonds backed by European real estate before the global financial crisis, you’ve lost money, or will. If those bonds were sold by Credit Suisse Group AG, the odds are even higher.

Holders of commercial mortgage-backed securities originated by Credit Suisse have incurred 1.2 billion euros ($1.3 billion) of losses as of November, according to data compiled by Bloomberg. That’s more than three times the losses on Royal Bank of Scotland Group Plc deals at 353 million euros -- the next highest amount -- and the 295 million euros on notes from Lehman Brothers Holdings Inc., which collapsed in 2008, the data show.

The breakdown is shining a light on where investors are seeing the most losses in the 49 billion-euro market, especially for originators like Credit Suisse’s who sold the vast majority of their notes when property prices were at their peak. The pain for investors is far from over as legal battles threaten recoveries and administrators fail to resolve deals where about 13 billion euros of underlying loans are delinquent.

“Credit Suisse originated several transactions at the top of the market, and most CMBS issued in 2006 and 2007 ran into difficulty,” said Solveig Loretz, a former Morgan Stanley securitization banker who advises on structured finance transactions at Solo & Partners Ltd. in London. “The property market was very hot at the time and certain securitization players thought that the upward trend in property prices would continue.”

Adam Bradbery, a spokesman at Credit Suisse in London, declined to comment on the performance of the bank’s CMBS transactions.

Credit Suisse, which sold 80 percent of its commercial mortgage bonds in 2006 and 2007 when real-estate prices were at their peak, originated 10.4 billion euros of transactions starting in 2004, making it the fifth-largest originator of deals sold before the end of 2008, Bloomberg data show. Losses represent 11.4 percent the bank’s deals, the data show.

The bank hasn’t sold CMBS since August 2007, Bloomberg data show.

Deutsche Bank, which started its CMBS issuance program in 2003, is the largest originator with just under 19.6 billion euros, followed by Morgan Stanley, which in 1999 became the first lender to develop a CMBS program, with 19.4 billion euros. Losses total 17 million euros, or 0.09 percent, of Deutsche Bank’s deals, and 6.7 million euros, or 0.03 percent, of Morgan Stanley’s sales, the data show.

“Those banks that entered the CMBS market earliest benefited from a first-mover advantage that meant they could develop a client base of borrowers without having to lower standards to win clients,” said Paul Heaton, a CMBS analyst at Deutsche Bank in London. “Those that came later had a greater need to chase business if they wanted to be competitive.”

The collapse of real-estate prices during the crisis shuttered Europe’s commercial mortgage bond market and left thousands of properties worth less than debt supporting them. Managers showed a reluctance to deal with the delinquent loans and as delays turned into years, weaknesses in documentation underlying the CMBS transactions became evident. Court actions followed and every part of the structures came under scrutiny, further delaying resolution.

A five-star hotel overlooking Berlin’s Brandenburg Gate, a business park outside Marseilles and nursing homes in the U.K. are among properties financed by loans from Credit Suisse which the bank subsequently packaged into CMBS.

“Borrowers that bought properties at the peak of the market ended up with very large negative equity very quickly once real estate prices fell,” said Oliver Schmitt, a senior analyst at Moody’s Investors Service in Frankfurt. “Most banks at that time were using too much leverage and had weaker underwriting standards.”

More than half of the Credit Suisse’s transactions are secured against collateral in the euro region, where property values generally rebounded slower than in the U.K.

Office values in the City of London peaked at 18,742 euros per square meter in the first half of 2007, before falling to a low of 9,283 euros two years later, according to data compiled by broker Knight Frank LLP. Prime offices in Madrid reached 12,308 euros in 2007 and fell to as little as 4,850 euros in the second half of 2012, according to the data.

London, Madrid

In London, office prices are now above the pre-crisis peak at 22,798 euros per square meter in the third quarter of 2015, while in Madrid they remain well below the 2007 high at 7,950 euros per square meter, Knight Frank data show.

Almost 13 billion euros of loans packaged into CMBS and graded by Moody’s Investors Service are now being managed by administrators. The so-called special servicers are supposed to try to recoup as much money as possible for investors by either restructuring the loans backing the deals or selling the debt. They can also foreclose and seize properties.

Losses will rise to about 70 percent for holders of 569 million pounds of senior notes in a 2006 Barclays securitization that’s been in special servicing since 2008, according according to Fitch Ratings. The 281 million pounds of lower-ranking tranches will be wiped out entirely, the rating company forecast.

Deutsche Bank has the largest volume of CMBS loans currently in special servicing, according to Moody’s. A total of 30 of its loans worth 2.7 billion euros are currently held by administrators. That compares with 21 loans worth 1.9 billion euros for Credit Suisse, the next largest amount, which includes four loans in transactions where the Swiss bank partnered with additional lenders.

Officials for Barclays, Citigroup Inc., Deutsche Bank, Morgan Stanley and RBS declined to comment on losses on their bank’s deals.

“On some legacy CMBS deals, noteholder losses are taking a long time to be realised, either due to lengthy work-out timelines or the synthetic structure of the deal,” said Erik Parker, an asset-backed securities strategist at Nomura Holdings Inc. in London. “We are therefore only part way through the losses on legacy CMBS. In the end, I would expect losses to be concentrated amongst deals issued by ABN Amro, Barclays, Credit Suisse and RBS.”

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