OVERVIEW -- German multifamily housing remains one of the strongest-performing sectors for European CMBS loan repayments, but only three loans have repaid of the seven that have already matured this year. -- While the average loan size in the sector is EUR123 million, each of this year's repaid loans totaled EUR16 million or less. -- Next year, 70% of the sector's maturing balance will have to refinance in a restricted market, with the largest three loans composing 73% of that year's maturing balance. -- Our study of loan-to-value ratios in the sector suggests that 63% of the maturing balance could fail to repay in 2012 and 2013. -- Income stability--due to portfolios' granular nature--may support the sector in the coming months, allowing special servicers time to define and execute appropriate workout strategies. LONDON (Standard & Poor's) July 2, 2012--Although German multifamily housing (MFH) remains one of the strongest-performing sectors when looking at loan repayment rates, these may have peaked, according to Standard & Poor's Ratings Services' latest European commercial mortgage-backed securities (CMBS) monthly bulletin. Our study this month suggests that loan sizes, maturity concentration, and loan-to-value (LTV) ratios could challenge the sector's ability to maintain the repayment rates previously observed--particularly in a constrained market. While loans in delinquency and special servicing have been minimal compared with other sectors--mostly due to the stable and granular nature of the portfolios backing the loans--maturity payments have begun to deteriorate this year. Until the end of 2011, only about 3% of all maturing German MFH loans had defaulted (not including extended loans from 2011), compared with about 12% of all maturing loans in European CMBS. This year, only three have repaid of the seven that have already matured. The three repaid loans were for EUR16 million or less, while those that extended averaged EUR111 million. We expect repayment rates to continue their decline into 2013, when 70% of loans in the sector are set to mature, with the largest three accounting for 73% of the year's maturing balance (although we understand that borrowers are actively exploring restructuring and refinancing solutions). As with the wider CMBS pool, LTV ratios have proven key indicators of refinancing prospects in the sector: Of the three repaid loans this year, two had reported LTV ratios of 49% or below, while the third had an LTV ratio of about 70%. When considering our data for Q1 2012, which suggest that borrowers may struggle if their LTV ratios are greater than 60%, then 63% of the sector's maturing balance could struggle to repay in 2012 and 2013. These factors have also affected our views on the creditworthiness of notes in German CMBS transactions backed by MFH loans. For instance, we recently lowered our ratings in German Residential Asset Note Distributor PLC, due to our view on the refinance risk in the transaction (see "Ratings Lowered On CMBS Deal German Residential Asset Note Distributor Classes A And B On Refinance Risk; Rest Affirmed," published on March 7, 2012). Nonetheless, we've seen little evidence of distressed sales of the loans that we rate, but rather more extensions. We consider that income stability from the portfolios' stable and granular nature may support this sector in the coming months by allowing special servicers time to define and execute appropriate workout strategies. RELATED CRITERIA AND RESEARCH -- European CMBS Monthly Bulletin (June 2012): Can German Multifamily Housing Rise To The Refinance Challenge?, July 2, 2012 -- Ratings Lowered On CMBS Deal German Residential Asset Note Distributor Classes A And B On Refinance Risk; Rest Affirmed, March 7, 2012 The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to email@example.com. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com.