November 8, 2012 / 6:03 PM / 5 years ago

CMBS defaults because loans perform too well

LONDON, Nov 8 (IFR) - Bellatrix (Eclipse 2005-2) has defaulted, despite it being one of the strongest deals in European CMBS. So many of the loans have paid down early that there is not enough interest coming off the remaining loans to stay current on the notes - despite the top three classes being paid in full.

CMBS notes pay down when the loans behind them pay back principal, but some parts of the deal - like the fees needed to maintain the structure - do not shrink in proportion. CMBS structures arranged pre-crisis often also feature interest rate swaps, which can end up sucking money out of the deal.

In Bellatrix, GBP170k went to the swap provider Barclays - out of total interest of GBP243k. Most of the loans backing the deal have already repaid so are no longer paying interest.

All three loans still outstanding are current with their payments and are in primary servicing, but with only GBP16.5m outstanding, there is simply not enough interest coming off them each quarter.

Investors are likely to get their money back - the collateral backing the three loans has actually risen in value, to around GBP26k, according to Fitch - but will suffer a technical default, with notes now immediately due and payable.

Rating agencies are also partly to blame, with GBP51k leaving the CMBS structure this quarter to pay rating fees. Other fees, including servicing, liquidity facility, and trustee, left only GBP359.73 to distribute to Class D noteholders - meaning a GBP6,387 shortfall.

Class E interest can be deferred until the final maturity date without triggering an event of default - GBP184,623 has accrued on this ledger.

However, Class D cannot defer interest, so the shortfall -small in deal terms - triggered a note event of default. The trustee, BNY Mellon, is able to enforce security, but has said it will not do so until directed to by the noteholders.

The default administration group is now taking steps to contact noteholders, and looking at other fees that have leaked out of the transaction.

Class D is the most senior outstanding class, but has only GBP2m of principal left, from an original GBP26.5m. It is rated AAA by Fitch and A by S&P. Class E has GBP14.5m of GBP17.7m original size. The whole deal totalled GBP393.7m at closing.

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