Reducing the Tail Period: A Potential Sting in the Tail for Noteholders?

This commentary discusses recent attempts by certain sponsors of DBRS Morningstar-rated European commercial mortgage-backed securities (CMBS) transactions that are approaching their final loan maturity date to restructure the transaction by extending the final loan maturity date. In particular, this commentary considers the potential complications of extending the final loan maturity date and reducing the tail period of a transaction (i.e., the period between the maturity date of the last maturing loan and the bond maturity).

With rising interest rates increasing refinancing costs and negatively affecting property values, this year, DBRS Morningstar expects an increase in the number of borrowers and sponsors attempting to restructure their loans and potentially the related European CMBS transactions. Restructurings, including by extending the loan extension date, can help to avoid loan defaults at the final maturity date and loans being transferred into special servicing.

In DBRS Morningstar's view, it is preferable that the loan is in special servicing if the final loan maturity date is extended while keeping the note maturity constant, as there is often increased transparency and enhanced analysis when the loan is in special servicing.

However, “each restructuring proposal will need to be judged on its own merits and potential complications and credit rating implications evaluated, especially given that the restructuring proposals will vary as they will be influenced by the original loan and transaction structures”, said Sioban Sugrue, Assistant Vice President of European CMBS at DBRS Morningstar.