A higher interest rate environment affects commercial real estate (CRE) loans in different ways. Borrowers feel the squeeze as higher financing and hedging costs make floating-rate loans more expensive. Higher interest rates also tend to reduce CRE values, which increases leverage in the loans and requires borrowers to drum up more equity.

Due to the continuous increase in interest rates, several European commercial mortgage-backed securities (CMBS) loans have had their maturity dates extended by one year, resulting in them being either unhedged or extended with higher hedging rates. This may result in borrowers struggling to pay interest on their loans, given current higher interest rates. In this article, S&P Global Ratings takes a closer look at the loans that are due to refinance in 2024 and the loan maturity profile for European CMBS overall. We currently monitor CRE loans in European CMBS transactions from various countries and property types, although the U.K. now accounts for the country with the highest exposure (95%), followed by Germany (see chart 1 for sector exposure).

Chart 1

Maturity Wall Looms

Previously, our focus was on whether borrowers could pay their interest due to a temporary rental collection decline during the COVID-19 pandemic. Now that property cash flows have stabilized, our main concern is whether the borrowers can repay the principal at loan maturity.

Loans initiated in 2018 and 2019 (record years for new issuance) were mainly for a five-year period (including loan extensions), which means that most of the loans we monitor were due to refinance last year and this year. A large proportion of the loans due to mature in 2023 had extension options which have been exercised and the loans are now due to mature in 2024 (see charts 2 and 3 showing upcoming maturities and reported loan-to-value [LTV] ratios).

Chart 2

Chart 3

Loan Maturities Overview

The bulk of the loans due to mature this year are in the U.K., although the continental European loans also have upcoming maturities. Of the six U.K. loans due to mature in 2023, only two repaid. The Project Campus loan in the Taurus 2018-2 UK DAC transaction was repaid in August 2023. Scorpio (European Loan Conduit No. 34) DAC repaid this year on the February 2024 interest payment date (IPD). Three of the other loans in the Taurus 2021-5 UK, Agora Securities UK DAC, Highways 2021 PLC, and Salus (European Loan Conduit No. 23) transactions have had their loan maturity dates extended by one year. Taurus 2021-5 UK, Agora Securities UK DAC, and Highways 2021 PLC are all due to mature this year. The Salus (European Loan Conduit No. 23) loan was extended until January 2025, which is in the tail period, meaning that the workout period has now decreased from five years to four years. The Elizabeth Finance 2018 DAC loan remains in default and is the only loan we monitor that is in special servicing.

Seven loans in the eurozone were due to mature in 2023. Of these seven loans, three loans repaid: The Big 6 loan in Kanaal CMBS Finance 2019 DAC on the August 2023 IPD, the EOS (European Loan Conduit No. 35) DAC single loan on the January 2024 IPD, and the Pearl Finance 2020 DAC transaction on the February 2024 IPD.

The remaining loans (Berg Finance 2021 DAC [Sirocco loan], Bruegel 2021 DAC [Senior loan], Taurus 2019-4 FIN DAC [single loan], Starz Mortgage Securities 2021-1 DAC [Node loan], Berg Finance 2021 DAC [single loan], and Oranje (European Loan Conduit No. 32) DAC [Phoenix loan]), which were due to mature in 2023, have had their loans extended by one year and are now due to mature in 2024. The Phoenix loan in the Oranje (European Loan Conduit No. 32) DAC has had its loan extended into the tail period, which means the tail period for this loan is now four years rather than five years.

U.K. Loan Maturities

Table 1 summarizes upcoming maturities for loans backing U.K. CMBS transactions that we rate. We assess default risk using various qualitative and quantitative inputs, such as the current (estimated) leverage, interest coverage with and without hedging, the nature of the loan collateral, and the underlying property income's stability.

Table 1

Elizabeth Finance 2018 DAC (Maroon Loan)

The Maroon loan is in default already and has been in special servicing since April 2020, following a breach of the LTV covenant. The loan was accelerated in October 2020. The 92.0% LTV ratio is based on a January 2020 valuation. The DSCR is currently below 1.0x at 0.98x. As of the October 2022 IPD, the covenant threshold for the DSCR had been triggered. Interest was paid in full at the latest IPD. Per the investor report, the special servicer is pursuing a longer-term management strategy, which includes the conversion of one of the assets to student housing and another asset to residential use. The special servicer has to complete the workout of the loan by July 2028, which is when the notes mature.

SGS Finance PLC (SGS Finance PLC 1)

The series 1 notes' expected maturity date can be extended to Dec. 31, 2024. The final legal maturity date is March 2028, so the loan has already entered the last five years of its term. Should the initial loan facility and the super senior new money facility be extended again, it would leave very little room for the issuer to liquidate the assets. Although the issuer paid down the super senior new money facility substantially on the latest IPD, the senior noteholders do not currently receive any interest. We rate the notes on a principal-only basis at the issuer's request, and our 'CCCp' rating reflects that the noteholders would only be repaid if market conditions are favorable as the transaction's LTV ratio exceeds 100%. Given the transaction's history of restructurings and current leverage, it is unlikely that the notes will be repaid on either the expected or the extended maturity date.

Moreover, we understand that SGS has launched a U.K. scheme of arrangement, which is essentially a restructuring proposal that would result in a partial repayment of the rated notes, but we have not been made aware of any outcome from the related hearings.

Taurus 2021-5 UK DAC

This loan is a vertical slice of a larger senior loan (11%), and the LTV ratio (59.0%) applies to both the securitized loan and the whole senior loan as the market value is allocated in proportion to the loan amount. In the third quarter of 2023, it was extended for the second time to May 2024, with the same hedging conditions and one more contractual extension option left for one year. A portfolio of student accommodation properties secures this interest-only loan, and its LTV ratio of 59.0% (based on a valuation in October 2022) fluctuates due to the capital expenditure (capex) facility being drawn. The operator has gradually increased occupancy at the properties. We believe the loan maturity will be extended again this year.

Agora Securities UK 2021 DAC

The retail warehouse loan backing this transaction was extended by one year beyond its initial maturity date in the fourth quarter of 2023. New hedging was also established in the form of a cap, which is now 4.25% compared to previously, when the cap rate was 2.00%. It has two remaining extension options of one year each. The servicer reports a strong debt yield of 19.7%. The LTV ratio is only 41.1%, based on a July 2022 valuation. The weighted-average lease term to break is 5.4 years and occupancy at the properties has steadily increased since closing. The annual contractual rental income covers the interest paid by about 3x (the servicer does not report a net operating income). The loan maturity will likely be extended again.

Viridis (European Loan Conduit No. 38) DAC

The three-year loan is set to mature in July 2024 with no extension options available. A cash trap event continues, given its reported debt yield of 6.7% (threshold 8%), although it benefits from a low interest cap rate of 1.00%. The increased LTV ratio of 73.9% due to a lower valuation figure (-13.3%) reported in October 2023 has triggered another cash trap event (threshold 70%). The loan is secured by the Aldgate Tower office building in London. We believe the relatively good asset quality with a weighted-average lease to break of 5.4 years would support the loan's refinancing this year. However, as this loan is secured on an office property with an LTV ratio of over 70% and debt yield of 6.7%, we believe this loan has a high risk of defaulting.

Starz Mortgage Securities 2021-1 DAC (Sellar loan)

The loan matures in July 2024 and is currently unhedged after the interest rate cap expired in July 2022. It has a current LTV ratio of 62.4%. The servicer amended the loan in June 2023 by waiving LTV and interest coverage ratio (ICR) covenants until its maturity. In addition, the interest reserve became unavailable for debt service, with the sponsor managing any shortfalls. The interest reserve will be used to amortize the loan, which will accelerate its deleveraging. A portfolio of three U.K. hotel properties secures the loan. Because the properties' net operating income has steadily increased since the COVID-19 pandemic, we expect the loan to repay at maturity.

DECO 2019-RAM DAC

The loan has no extension options available and is within its last year of a five-year term. The borrower significantly prepaid the loan and note balance on the May 2023 IPD, which satisfied the LTV ratio and ICR covenants. The securitized loan LTV ratio is 22.3%. We believe the loan is in a very good position to refinance.

Frost CMBS 2021-1 DAC

The loan (denominated in British pound sterling and euro) is secured on three cold-storage facilities in England, Germany, and France. It is set to mature in December 2024 and is structured with two one-year extension options. The servicer reports a moderate LTV ratio of 64.3% and debt yield of 9.7x, respectively. We believe the special tenant needs for such properties will support the loan's extension, although the current interest rate cap of 2.00% will probably rise at loan extension.

Helios (European Loan Conduit No. 37) DAC

This is one of two rated transactions secured by a U.K. hotel portfolio, whose revenue suffered from COVID-19 lockdowns but has rebounded to pre-pandemic levels since 2023. The maturity of the loan is in December 2024, with no extension options. The robust debt yield of 14.4% should sufficiently cover interest payments, hedged at a cap basis rate of 5.00% since the previous 3.00% rate expired in December 2023. The 63.3% LTV ratio is based on a December 2022 valuation, which could decline when a new valuation is confirmed. We consider the loan's refinancing prospects to be good.

Highways 2021 PLC

This is the first transaction backed by U.K. motorway service stations that we have rated. The loan has been extended on its initial maturity date and can be further extended two times by one year each. As a result of the loan being extended, the hedging has also been extended and the hedging rate has increased to 3.0% compared to 0.9% previously. The properties are all leased to a single tenant, Welcome Break, which has EBITDAR that covers its rent by 1.7x. An interest rate swap renewed with the loan extension in December 2023 protects the current interest due. Given the underlying tenant's stable performance and the EBITDAR, we believe the loan will be extended again.

Magenta 2020 PLC

The loan secured by a portfolio of U.K. hotels has an initial two-year term with three one-year extension options. At original loan maturity in December 2021, the loan did not meet the extension conditions and was restructured. Part of the restructuring was to extend the senior loan maturity date to December 2024. The hotels' operational performance has recovered well post-COVID-19, and the debt yield has improved to 10.4% on the latest IPD. In our view, the loan will be fully repaid at loan maturity.

Salus (European Loan Conduit No. 33) DAC

The senior loan's initial maturity date was in January 2022, and it has been extended twice (by one year each time) in line with the loan agreement. Based on the most recent valuation, which is from March 2023, the collateralized property value is 14% lower than two years ago, and the LTV ratio is consequently higher, at 54.9%, given changes in the CRE markets. We lowered our rating on the class B notes in this transaction in October 2023, as the notes were unable to withstand the cash flow stress caused by rising interest rates at a higher rating level. The property still struggles with an above-market vacancy rate of 17.6%, although this has improved gradually.

At the same time, we affirmed our ratings on all other classes of notes, given the stable credit quality of the collateral overall, and a well-located, good-quality office property in central London. The weighted-average lease term to break for the remaining tenants also extends more than five years past the loan maturity date. The senior borrower requested a 12-month extension to the senior loan maturity date from Jan. 20, 2024, to Jan. 20, 2025, which was granted, alongside amendments to the senior loan. Due to the 12-month extension being granted, the five-year tail period has now been decreased to four years. However, we still believe that the refinancing prospects for this loan are good, as the collateral is a well-located, good-quality office property in Central London.

Eurozone Loan Maturities

Table 2

Berg Finance 2021 DAC (Sirocco loan)

Only one loan remains in this transaction, backed by a single property (an office building in Vienna), after two were sold. The loan benefits from a low interest burden based on a 1.75% interest rate cap. While the interest coverage has improved slightly, the loan may be unable to secure a new interest rate cap at its initial maturity in April 2024 and not qualify for the first of its two loan extension options. However, the sale of the Dutch property in January 2023 has caused further loan deleveraging, and the borrower could also dispose of the remaining property before the loan maturity date, which should yield enough proceeds to fully repay the loan.

Bruegel 2021 DAC

The loan is set to mature in May 2024 and has two one-year extension options. Our S&P Value is 8.7% higher than at closing, underpinned by sustainable rental income generated and relatively low vacancy of the assets (predominantly office buildings) located in the Netherlands. However, we are cautious about the negative effects on office space demand due to the hybrid working trend and economic downturn. The loan benefits from a low interest rate burden based on a 1.5% interest rate cap, which we expect to increase upon loan extension. The transaction's LTV ratio of 57.4% is based on an August 2023 valuation. Its debt yield of 13.0% remains healthy due to the secured commercial properties' overall good location and quality. Therefore, the loan is likely to be extended.

Oranje (European Loan Conduit No. 32) DAC (Phoenix loan)

The last remaining loan has been extended for one year beyond its final maturity, subject to several changed conditions. The newly agreed interest rate cap (3.5%) and loan margin were significantly higher, partially offset by the minor prepayment from an equity injection. We believe this will weigh on the loan's ICR, which should reach about 2x based on the projected net rental income according to the most recent investor report. Despite high structural vacancy in the underlying office portfolio in the Netherlands, the annual contractual rent has increased slightly since November 2022. The 49.8% LTV ratio is based on an April 2023 valuation. Refinancing prospects are less positive, but still good, in our opinion. As the new loan maturity has been extended until August 2024, this now results in a four-year tail period. According to our criteria, this is shorter than our expected minimum tail period of five years for a 'AAA' rating. We therefore lowered our ratings on the class A and B notes to 'AA (sf)'. Overall, we believe this loan has a moderate risk of refinancing.

Taurus 2019-4 FIN DAC

A third-quarter 2022 valuation showed a slight increase in value for the remaining properties after one was sold. The borrower used its last extension option in third-quarter 2023. The larger of the two remaining assets is a shopping center in Finland, which has struggled with high vacancy of about 10%. The weighted-average lease term to break is short at 3.6 years, but the debt yield exceeds 12% when including trapped cash. The cash trap event has been cured as the debt yield now meets the threshold without trapped cash. Overall, we believe this loan is in a good position to refinance.

Starz Mortgage Securities 2021-1 DAC (Node loan)

The loan matured on Oct. 15, 2023, and is unhedged. The borrower and the loan facility agent, amongst others, amended and restated the loan agreement in October 2023. Subject to satisfying the conditions precedent and meeting milestones, the loan maturity date is extended to latest October 2024. However, a low ICR of about 1.3x means headroom is limited to account for a higher interest burden under a replacement loan. Interest could exceed the income from the property as the debt yield is only 6.5%. Moreover, the LTV ratio of 70.1% is relatively high. The collateral is a multifamily property in Dublin, which is a notoriously competitive market, given the scarcity of residential supply, which may help with the refinancing.

Frost CMBS 2021-1 DAC

The loan (denominated in British pound sterling and euro) is secured on three cold-storage facilities in England, Germany, and France. It is set to mature in December 2024 and is structured with two one-year extension options. The servicer reports a moderate LTV ratio of 64.3% and a debt yield of 9.7x, respectively. We believe that the special tenant needs for such properties will support the loan's extension, although the current interest rate cap of 2% will probably rise at loan extension.

Taurus 2021-3 DEU DAC

The loan will mature in December 2024 with no extension options exercisable. It is secured by the Squaire building complex adjoining Frankfurt Airport, comprising primarily office space and two hotels. We believe the office component could be subject to a longer vacancy, above the submarket's average and requiring capex to be spent in order to attract and retain tenants. Nevertheless, the hotels' operational performance and cash flows have stabilized after years of COVID-19 pressures. Also, the loan benefits from interest rate protection at a historically low rate of 0.11% plus a margin. At current rates, our forecasted annual net cash flow would not cover interest. There is less than one year left under the interest rate hedge, but we believe the combination of higher interest rates and a moderate debt yield of 7.5% particularly challenges this loan's refinancing prospects.

Most Maturing Loans Have Low Refinance Risk

We believe that refinance risk is low for most loans that are due to mature over the next 12 months. The majority of eurozone loans in our surveillance book mature by December 2024, disregarding loan extension options. The weighted-average LTV ratio for eurozone loans is 56.3%, compared to 56.2% for U.K. loans. The highest current LTV ratio in the eurozone loans is 70.1% for the Node loan in Starz Mortgage Securities 2021-1 DAC.

In our view, office and retail loans will find it harder to refinance this year, given the already stressed market. The hybrid working trend has left real estate investors and lenders concerned about the extent of future cash flows and value declines. Loans secured on industrial/warehouse or residential properties will find it much easier to refinance, given the more positive market outlook for these sectors. Retail property values seem to have stabilized after many years of continuing decline. However, online shopping continues to be more popular. Physical location retailers face ongoing pressures from declining rents and occupancy rates.

The last time the CRE markets experienced a similar decline in values was during the global financial crisis (GFC). The markets experienced similar loan maturity walls but the leverage on CRE loans was much higher then. Most of the loans were then originated at 80% leverage or more, leaving borrowers little incentive to participate in a workout and the loans with little room to withstand market value declines. We believe that the situation is fundamentally different today.

Overall, we believe the majority of loans (in our ongoing surveillance of European CMBS transactions) due to mature in 2024 are in a good position to refinance. Even if these loans default, most should be able to fully repay the debt during a workout process and before the notes' maturity date.

Structural Changes

Another noteworthy difference is that CMBS structures now differs significantly from 2005-2007 vintages. In particular, these pre-GFC transactions featured very short tail periods. Oftentimes, the special servicers only had two years between the loan maturity and the note maturity to resolve a loan, which led to many of these collateral properties being sold in fire sales at significant discounts to already depressed values. Tail periods are now more than double in length, with a minimum of five years, which structurers designed to avoid panic selling.

But What If A Loan Does Default?

When a loan defaults, it is typically transferred to the special servicer. The default gives the special servicer more powers to put pressure on the borrower and they can also often replace the property manager. Should the borrower not cooperate in an orderly workout, the special servicer can enforce on the security and take control of the property. At the height of the COVID-19 pandemic, when a number of loans breached performance thresholds that led to loan defaults, special servicers often agreed to plans with borrowers that included requirements for borrowers to provide more equity or give up excess cash flow in the loan, if any.

According to the servicing standard, which is written up in the servicing agreement between the issuer, the servicer, and the special servicer, the special servicer needs to act in the noteholders' best interest. However, investors have expressed that servicers tend to act more in the borrower's interest rather than the noteholders. We believe that this frustration stems from different noteholders having contrasting interests. The interests of the junior noteholders often conflict with those of the senior noteholders and the servicer and special servicer need to satisfy both.

For example, when a loan with a 90% LTV ratio defaults, the junior noteholders may want a quick exit before the situation deteriorates further and they might suffer a loss. At the other end of the spectrum, the senior noteholders may be getting a good return and can withstand a significant decline in value so they may favor a stabilization of the underlying assets. From our perspective, we rely on the special servicer to maximize the recovery for all noteholders. Matters of bond yield and duration are not in scope for our ratings.

From a ratings perspective, our analysis assumes a 100% probability of default so the loan default in and of itself does not result in any rating action. Where loans have performed below our expectations, our rating actions reflect the increased risk that the issuer may suffer losses in stressed environments. We do not assess the strength of the borrower's sponsor as part of our analysis because the loans are nonrecourse and the sponsors are not obligated to support the rated bonds. Moreover, we typically do not rate these borrower sponsors.

Successful Refinancing Is Likely

The substantial number of loan maturities this year is due to the significant amount of new issuance in 2019 and is unavoidable. Although this concentration of loan maturities is far from ideal due to high interest rates, we think the prudent loan underwriting in these loans compared with older vintage CMBS loans underwritten before 2008 is now going to pay off. Some loan defaults are likely unavoidable, and a small number of them may even end up in a workout situation with a principal loss, but those loans maturing in 2024 are likely largely well-positioned for successful refinancing.

Although we may take some negative rating actions this year, we incorporated refinancing risks in our 2022-2023 rating actions, and structural features--notably longer tail periods--will help mitigate losses for the rated notes.

European real estate is still recovering, but we expect this year to be more positive than last year. We expect office leasing rates to increase slightly but be lower than the historical norm due to hybrid working. We expect vacancies for offices to reach their peak this year, and prime rents to increase marginally. Logistics had a tough year last year, and we expect this to continue this year. We believe that prime rents will increase, but at a moderate rate. Some sectors, such as grocers and discount retailers, should increase their uptake of logistics space this year. We expect retail sales to increase this year, although online sales will also continue to grow, but at a slower pace. We believe that some retailers will return to traditional trading from shops, but these will be in prime locations only. As a result, we expect that prime rental growth will be stable for this sector. Tourism should grow in Europe this year, having a positive impact on hotel revenue per available room.

A note on our data

We have excluded the loans in our granular pool transactions, because of their size, and the loans in the credit tenant lease transactions, because they do not feature refinance risk.

As we cease monitoring loans once they prepay, our analysis does not include the loans that would still be outstanding had they not prepaid earlier than scheduled.

Related Research

• Berg Finance 2021 DAC Class B To E CMBS Ratings Raised; Class A Rating Affirmed, Nov. 10, 2023
• Oranje (European Loan Conduit No. 32) DAC Class A To D Dutch CMBS Ratings Lowered; Class E Notes Affirmed, Oct. 23, 2023
• All Starz 2021-1 DAC U.K. And European CMBS Ratings Raised, Oct. 19, 2023
• Salus (European Loan Conduit No. 33) DAC Class B U.K. CMBS Rating Lowered; Other Ratings Affirmed, Oct. 5, 2023
• Frost CMBS 2021-1 DAC EUR And GBP Notes Affirmed, July 13, 2023
• Bruegel 2021 DAC Dutch CMBS Ratings Affirmed, June 29, 2023
• DECO 2019-RAM DAC Class A And B U.K. CMBS Ratings Raised Following Note Prepayment, June 15, 2023
• Viridis (European Loan Conduit No. 38) DAC U.K. CMBS Ratings Lowered, June 6, 2023
• Elizabeth Finance 2018 Class A To C U.K. CMBS Notes Ratings Lowered; Class D And E Notes Affirmed, June 1, 2023
• Taurus 2019-4 FIN DAC Finnish CMBS Ratings Lowered, May 23, 2023
• Helios (European Loan Conduit No. 37) DAC Class B To D CMBS Ratings Raised; Other Ratings Affirmed, May 5, 2023
• Highways 2021 PLC U.K. CMBS Notes Ratings Affirmed, May 4, 2023
• Taurus 2021-5 UK DAC U.K. CMBS Ratings Affirmed, May 4, 2023
• Taurus 2021-3 DEU DAC German CMBS Ratings Lowered On Four Classes; Two Classes Affirmed, March 23, 2023
• SGS Finance PLC U.K. CMBS Notes Ratings Affirmed Following Review, March 16, 2023
• Magenta 2020 PLC U.K. CMBS Ratings Affirmed, March 16, 2023
• Agora Securities UK 2021 DAC CMBS Ratings Affirmed, March 10, 2023
• European CMBS Faces Crunch Time With Loan Maturities Amid Higher Interest Rates, Feb. 23, 2023