EUROPEAN CMBS PERFORMANCE

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EUROPEAN CMBS PERFORMANCE

• CORPORATE VALUATION CONFERENCE 2004
• ISTANBUL

Marie-Noëlle Brisson MAI, CRE mnremiew_at_yahoo.com
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Presentation

• Growing and maturing asset class
• Performance so far
• Monitoring performance

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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GLOBAL CMBS ISSUANCE
billions
Source Commercial Mortgage Alert
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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REGIONAL CMBS ISSUANCE
billions
Source Commercial Mortgage Alert
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Non-US CMBS issuance (in bil.)
Source Commercial Mortgage Alert
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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European country market share (in bil.)
Source Commercial Mortgage Alert
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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2004
Source Commercial Mortgage Alert
billions
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Collateral Outstanding

• By year of transaction close

• By structure type

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Behind Issuance Volume

• Increase in number of transactions
• Diversification in asset class and countries
• Emergence of new issuers
• Conduit platforms more prevalent
• Standardization picking up

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Behind Issuance Volume

• Property Type Distribution, 2003

Source Moodys
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Performance

• Increased rating transition activity
• Ratings affirmed
• Upgrades
• Downgrades
• Relative stability of European CMBS
• Compared to US
• Despite softening of property market fundamentals

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Transition ratings
Source SP transition ratings, 2003
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Transition ratings
Number of classes
Source SP transition ratings, 2003
MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Q1- 2004 activities

• Still, a low portion of downgrade activity
• Several transactions affirmed

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Reviewing Performance

• Sound underwriting
• Convergence of market and regulatory pressure for
  ever better post-issuance reporting
• Servicer activities

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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What is servicing

• Definition of servicing
• ...The organization responsible for
  collecting loan payments from borrowers and for
  remitting the aggregate amounts received to the
  owner(s) of the loans..
• Relationships with various other actors
• Rating process

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Different types of servicing

• Primary servicing
• billing for, collecting and reconciling PI and
  escrow payments
• insuring property RE taxes are paid
• making sure property level insurance coverage is
  appropriate
• performing property inspections
• collecting and analyzing property financial
  statements
• remitting and reporting to investors or master
  servicer
• Special
• management and repositioning of NPL and real
  estate assets
• addressing portfolio objectives liquidation,
  timed disposition, long term investment

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Different types of servicing (2)

• Master
• review and approval of special requests
• oversight of primary servicers
• advances of recoverable principal and interest
  payments
• remitting and reporting to the trustee
• Back-up/stand-by
• shared services
• customized outsourcing of clients servicing needs
  
• investors can continue to manage the underlying
  relations with the borrower
• services provided under the investors names with
  Private label services

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Role of servicers

• Efficient markets need transparency, reliability,
  and independence of
• Data
• Auditors/valuers/underwriters
• Servicers
• Servicers can bridge the information gap
• Documentation of transaction requirements
• Access to primary or verified data on property,
  tenant. loan and market information
• Confidentiality, leading to more data granularity

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Why rated servicers are important to structured
transactions

• Strong internal control and advanced risk
  management skills help mitigate uncertainty and
  lack of transparence and give additional comfort
  to investors
• In some cases, credit and liquidity enhancement
  may be lowered based on the operational strengths
  of the servicers

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Servicer evaluation

• Management and organization staff background,
  training, internal audit, strategic objectives,
  and overview of business.
• Cash management and investor accounting
• Loan restructuring and asset management
  activities
• Investor reporting and remitting
• Subcontracting activities inspections,
  appraisals, legal, environmental, property
  management..
• Systems and Technology hardware/software,
  capacity, security, disaster recovery plan.

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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European Servicers

• As of Q1 2004, rated
• 9 servicers in Italy (all of them special except
  for 1)
• 4 in the UK
• 1 in Ireland
• No rated master servicer
• Several others non rated

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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European Servicers

• No rating changes in 2003 and 2004, mostly new
  ratings or confirmations
• Little outsourcing, but slowly gaining momentum
• 1 deal out of 18 in 2002
• 5 deals out of 27 in 2003
• 3 out of 8 in 2004 YTD

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Barriers to servicer outsourcing

• Customer relationship management what happens
  with customers data?
• Personnel and labor issues
• IT environment compatibility
• Cost savings?

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Positive drivers

• Continuation of corporate and government sales
• More property sector data
• Better reporting standards
• Performance so far

MNB May 28, 2004 Corporate Valuation
Conference Istanbul
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Conclusion

• As European CMBS market matures, investors expect
  more transparency
• Asset class to watch to see if
• relative stability persists, and
• if rated servicers can add real value to the
  monitoring of performance.

MNB May 28, 2004 Corporate Valuation
Conference Istanbul