I expected the SEC to release the final Reg AB language before the end of the year, but that did not happen. So, for a final post of the year, I thought I’d highlight steps the industry has taken on its own to improve transparency and investor protections, as well as define CMBS 2.0.
Upon reflection, there has been pretty good progress. 2010 CMBS deals saw four positive trends:
A major theme was reducing the conflict between the special servicer and the B Piece bond investor. Most of the 2010 deals had provisions limiting the B Piece owner’s ability to pick the Special Servicer by the introduction of the Senior Trust Advisor. These are third party consulting firms that oversee the Special Servicer and provide information to the investors. The Senior Trust Advisors have the authority to remove the special servicer and really do give the senior investors an oversight position on resolution strategies.
Projected vs. actual loss to pick special servicer
In CMBS 1.0, the controlling class that would pick the special servicer was determined by actual loss, not projected loss. Since the controlling class (the B Piece buyer) was also the special servicer in most cases, the potential for conflict in resolution strategies was apparent.
The 2010 CMBS deals all had the provision that losses and therefore control be determined by projected loss (appraised value) instead of actual loss. Specifically, the special servicer can be replaced by majority vote of remaining bond holders if appraised losses — as opposed to actual losses — exceed 75 percent of the most junior bond balance.
The 2010 CMBS deals record on increased transparency is mixed put there were definite positive trends.
On the negative side, none of the deals increase any additional “public” disclosure (all based on IRP 5 without rent rolls and underwritings) and, in fact, actually limited disclosure because they were all 144 A Private deals.
On the positive side, the issuers reportedly did share underwriting models and full assumptions with known investors as part of the investor “road shows.” So, if you were actually buying these bonds, the word is the issuers shared all. Other positive events include the CREFC increasing modification reporting with the release of IRP 5.1. Also CREFC are making proposals to standardize Annex A disclosures, Reps and Warranties and underwriting. While still missing some critical data, there was no doubt progress.
New B Piece Buyers
Attracting capital to buy below-investment-grade CMBS is key to CMBS 2.0. 2010 saw new entrants (most run by old players) to the B Piece market. Of the six deals done in 2010, the B Pieces were bought by four different firms:
Black Rock: three deals
H/2 Capital: one deal
Rialto Capital: one deal
Elliott Capital: one deal
So, with those positive thoughts, Happy New Year and I hope 2011 gives you more than 2010.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.