Bank of Ireland loans breach their covenants as values fall
Some 14 Bank of Ireland loans given for retails developments, shopping centres and offices have breached their loan covenants, with several in negative equity, figures show.
The loans, some of them worth between €178m and €208m, are mainly secured on properties in Ireland, but also in Germany and the Netherlands.
The loans have been packaged up and sold off to bond investors in a vehicle called Morrigan CMBS. Figures compiled by Fitch show 14 of the loans breaching covenants set at between 62pc to 80pc.
An analysis of the figures shows that some properties have loan-to-value ratios of more than 100pc now, with one unnamed property having a ratio of 141pc. The loan-to-value ratio measures the value of the loan as a percentage of the property's value.
Bank of Ireland declined to discuss the individual loans or their current condition last night.
"We don't, as policy, comment on specific numbers. The majority of the assets continue to perform and Fitch have maintained their AAA rating on the transaction,'' said a spokeswoman.
Banks have a number of options when a breach of a loan to value covenant occurs. They can enforce their security and sell the underlying property, they can restructure the loan, or they can simply accept the covenant breach for the time being. Bank of Ireland declined to discuss how it was approaching the issue.
Breaches of covenants are, however, a sign of stress and can be a predictor of defaults, where a borrower can no longer make repayments.
Fitch said yesterday that loan defaults on commercial mortgage-backed security loans were starting to increase steadily all over Europe. The agency pointed out that many banks were simply not carrying out valuations of their properties.
"Loan-to-value covenant breaches have been recorded on only 8pc of the portfolio, despite approximately half of loans having covenants, due to the continued lack of revaluations,'' said the agency.
The other danger sign for banks is that many of their commercial loans are about to mature and their borrowers are due to make large so-called balloon payments. This means the vast majority of the loan principal is paid off at the end of the loan.
"The number of loans moving into either default or special servicing continues to increase at a steady pace, although the affected loans still represent less than 10pc of the total,'' said Fitch.
"A further 10 loans defaulted in quarter 2, 2010, bringing the total for the year to 22 loans. While the reasons for default are varied, an increasing proportion relates to problems at loan maturity,'' it added.