What signal? For the first time since the 2008 financial crisis, European AAA-rated CMBS investors are facing losses!

Historically rare, the safest AAA-rated creditors are facing losses without an economic crisis!

According to a report released by American Bank analyst Mark Nichol on Wednesday, AAA-rated investors in a loan supported by a UK shopping center (Commercial Mortgage-Backed Securities, CMBS) are facing losses, which may be the first such event since the global financial crisis in 2008.

Even before expected losses in Europe, American AAA-rated CMBS investors have already suffered blows.

In May, according to Barclays' latest report, buyers of AAA-rated notes backed by a building in Midtown Manhattan, New York, received less than three-quarters of their original investment after selling at a significant discount. Barclays also stated that this is the first time AAA-rated CMBS bond investors have experienced such losses since the financial crisis.

Analysts believe that this situation indicates that there may be some serious problems in the global financial system, where even investments with the highest credit ratings are no longer safe.

Europe: CMBS Senior Creditors Face Losses

Nichol pointed out that based on the expected amount recovered from the disposal of underlying properties, holders of the A class (AAA portion) notes of Elizabeth Finance's 2018 Commercial Mortgage-Backed Securities (CMBS) may incur losses. The amount of loss depends on the amount recovered from the disposal of underlying assets.

Elizabeth Finance 2018 has been in default since 2020, and its special servicer, loan servicer Mount Street, has accepted a cash bid of £35 million to dispose of the Maroon property portfolio collateral.

Mount Street estimates the net proceeds from this property portfolio to be approximately £31.5 million, which is lower than the £33.6 million principal balance of the A class notes. American Bank predicts that based on Mount Street's estimate, the A class notes will incur a 6% principal loss.

Some media outlets pointed out that in April this year, rating agency Morningstar DBRS valued the collateral for this loan - three retail properties (including shopping centers in Kings Lynn, Dunfermline, and Loughborough) - at a total of £50.4 million.

Based on this valuation, the loan amount compared to the value of these properties is 125%, indicating that the loan amount may be slightly higher than the property valuation. However, Morningstar DBRS also cautioned that in the current challenging market environment, these properties may not be sold at the expected prices, which could affect loan repayment and related credit ratings In just two months, the market conditions have significantly deteriorated, as described by Bank of America:

The value of Maroon Properties has dropped dramatically, exceeding our expectations for 2021, when we predicted that principal losses might affect the B-class notes.

However, the actual situation is that the principal losses have extended to the higher-rated A-class notes. Currently, Morningstar DBRS rates the A-class notes as A (sf), while S&P rates them as BBB- (sf). It is worth noting that both rating agencies downgraded the credit ratings of these notes earlier this year.

The Situation in the United States is Also Grim

Before expected losses in Europe, U.S. CMBS investors suffered a similar blow.

According to a recent report by Barclays Bank, buyers of the AAA portion of $308 million in notes backed by a mortgage loan on a building in Midtown Manhattan's Broadway received less than three-quarters of their initial investment after the loans were sold at a significant discount in recent weeks.

All debt held by junior creditors has been wiped out.

According to Barclays, this marks the first time since the 2008 financial crisis that investors in the highest-rated bonds backed by commercial real estate have suffered such losses.

Serious Issues May Arise in the Financial Markets

It is worth noting that in April 2020, the market witnessed the first default of AAA-rated bonds since the global financial crisis, which is understandable given the almost stagnant economy at the time.

To rescue the economy, the Federal Reserve has been injecting massive amounts of funds into the market every day. In such an extremely uncertain environment, the supply of daily necessities became a problem, let alone the future returns of structured financial products.

However, it was shocking that in May 2024, when the S&P index hit consecutive all-time highs, indicating signs of market prosperity, AAA-rated debt instruments suffered a 25% devaluation.

Analysts believe that this situation indicates that there may be some serious issues in the global financial system, where even investments with the highest credit ratings are no longer safe.

Struggling Shopping Centers

According to reports, regional shopping centers in the UK, especially those dependent on department stores and fashion retailers, are the group most affected by e-commerce. Combined with the impact of the pandemic, some commercial real estate vacancies have not yet recovered, while rising interest rates have led to higher costs for them.

Cas Bonsema, an asset-backed securities (ABS) and covered bond analyst at Rabobank, commented:

The prices of these property sales indicate that the decline in property values may be more severe than we expected, but this may only apply to this specific portfolio. The situation with CMBS is always very specific, and in this case, these properties have been severely impacted by the pandemic Harjeet Lall, securitization partner at the law firm Pinsent Masons LLP, said:

There have been some signs of pressure in the CMBS market, especially around shopping centers, some of which have not fully recovered since the pandemic," "Many shopping centers are struggling due to reduced consumer spending and declining occupancy rates