(Bloomberg) -- Investors in what was the safest part of a loan backed by UK shopping malls are facing losses, possibly the first such impairment since the global financial crisis, according to Bank of America.

Analysts including Mark Nichol estimate that Class A noteholders of commercial mortgage-backed security Elizabeth Finance 2018 could suffer a shortfall, based on the amount that is expected to be recouped from the sale of the underlying properties. 

The anticipated losses in Europe follow a hit to investors in a US CMBS last month. Buyers of the AAA portion of a note backed by the mortgage on a building in midtown Manhattan got less than three-quarters of their original investment back after the loan was sold at a steep discount. It was the first such loss for investors in top-rated bonds backed by commercial real estate since the credit crunch, according to Barclays Plc.

The special servicer of the UK loan, which has been in default since 2020, said it had accepted a bid that would generate £31.5 million ($40.1 million) of net proceeds for shopping centers in Kings Lynn, Dunfermline and Loughborough, or the Maroon properties, in a statement this week. That compares with the balance of £33.6 million under the Class A notes, according to Bank of America.

As recently as April, ratings agency Morningstar DBRS estimated the value of the three retail properties underlying the loan at £50.4 million, which set the loan-to-value at 125%. However, the agency noted that there was “uncertainty around the outcome of the sales process against the backdrop of challenging market conditions”.

“The decline in the Maroon property values has been striking,” Bank of America wrote in a note to clients on Wednesday. “A shortfall would represent the first CMBS initially rated AAA to take a loss since the financial crisis in Europe, to our knowledge.” 

Mall Valuations

UK regional malls that relied on department stores and fashion retailers — which were among the most vulnerable to the rise of online shopping — were already suffering before the coronavirus pandemic forced them to close. Vacancy rates are yet to recover in some areas, with higher financing costs adding to an already challenging situation.

“This property sale price shows that declines may be more severe than thought, but it could be specific to this particular portfolio,” Cas Bonsema, ABS and covered bond analyst at Rabobank, said. “CMBS is always very specific and in this case the properties got hit hard by the pandemic.”

Oaktree Capital Management was the original borrower of the loan, with Goldman Sachs Group Inc. as arranger of the CMBS. The loan was first transferred to special servicing in 2020, after breaching covenants.

“There have been some signs of distress in the CMBS market, particularly around shopping malls, some of which haven’t really recovered from the pandemic era,” said Harjeet Lall, a securitization partner at law firm Pinsent Masons LLP. “Many malls are struggling because of reduced consumer spending and a drop in occupancy levels.”

--With assistance from Jack Sidders.

(Adds detail of US CMBS losses in third graph)

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