Possible Hedge Fund Crackdown headache for European Commercial Property Investors

Europe’s commercial property owners, saddled with €1.9 trillion of commercial debt, may be forced to make billions of euros in cash payments under planned laws that would treat them no different to hedge funds.

If the laws come into force under European Commission proposals to regulate the derivatives industry, property fund managers could possibly face demands for cash collateral to cover bets on interest-rate movements. According to a De Montfort University study, Interest-rate swaps were attached to about £130 billion of U.K. commercial property debt at the end of 2009. It was reported that most of these would be subject to such a collateral payment.

The EU aims to lower economic risks caused by derivatives after instruments such as contracts insuring mortgage-backed bonds fuelled the losses that led to the worst economic recession of modern times. The current proposals cover businesses including commercial property, private equity and hedge funds.

Commercial Property buyers currently use interest rate swaps to secure a fixed interest rate when taking out a floating-rate loan to buy a building. This helps ensure that the property’s rental income will be enough to service the loan, even if rates rise unexpectedly. Under the EU plans, a demand for collateral payment, or margin call, could result if interest rates go the opposite way than the swap anticipated.

Businesses unable to pay the collateral payment, or margin call, could be declared to be in default and therefore liable to legal recovery procedures and debt collection. The new laws, which must first be approved by the European Parliament and member states, would likely come into force by the end of 2012

The De Montfort study suggested that most of the commercial property investors whom bought shops, offices and warehouses during the five-year spree through to mid-2007 used interest-rate swaps to protect their mortgage repayments from rising interest levels. However, instead of continued economic growth, the rates fell, triggering liabilities to the other party in the swap. If the proposed regulations had been in place in 2007, it is thought U.K. borrowers would have needed to put up collateral of about £10 billion to cover swaps that moved the wrong way.

The total amount of debt secured against European commercial properties was about €1.9 trillion at the end of 2009, according to DTZ Holdings Plc. And whilst there is no available estimate for the portion of debt hedged by interest- rate swaps, a De Montfort study said that more than 50% the U.K. portion is likely attached to them.

This item from Chris Bourke at Bloomberg.com highlights the frightening scale of Eurozone commercial debt just in the commercial property sector and is something which CCDR can confirm.

During the last 12 months CCDR have been tasked in recovering numerous Eurozone commercial debt contracts which have arisen out of just such circumstance.

CCDR (Corporate Credit Debt Recovery Ltd) is a leading UK Commercial Debt Recovery specialist with international reach and a client base of SME’s and Eurozone multinational organisations.

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