CREFC heads campaign to find new CMBS structures

Committee of market participants will explore ways to restructure CMBS

The Commercial Real Estate Finance Council (CREFC) has set up a committee to help relaunch the European securitisation market. The European CMBS 2.0 Committee will make proposals on the structure of new issuance, consulting with bodies such as the Bank of England and the Financial Services Authority.

The committee’s membership,  now being finalised, will include investors, issuing banks, law firms and borrowers (see below). The CREFC has also set up a group to tackle class X Notes, which divert interest to CMBS issuing banks and have proved controversial in distressed deals.

Nassar Hussain, head of debt adviser Brookland Partners, will chair both initiatives. He said market participants and bodies like the CREFC must lead the way, rather than wait for third parties to produce principles on a deal-by-deal basis, which may not be as workable.

Europe’s CMBS market has been closed since mid 2007 but the US market re-opened last year and there are early signs of a revival here. The CREFC argues that if capital markets re-open for property financing it will help tackle a widening funding gap and the wall of debt that needs refinancing.

The CMBS 2.0 committee will first meet in May. Hussain said agreeing the key principles should take three to six months. Contentious issues could  take time to settle, such as the role of third parties; how the servicing structure works; what the servicing standard should be; how servicers are adhering to it; and the role of trustees.

The committee will look at  the wording of inter-creditor arrangements; reporting standards; and originators’ loan representations and warranties. Ways to identify note holders will also be explored. “Note holder registers are used in other capital markets sectors; there is talk of creating a role of note holders’ representative to fill a perceived gap between servicer and trustee,” Hussain said.

He added: “We need to work with investors – many of whom may be new to CMBS – and with borrowers to produce structures they feel comfortable with. “We also need to create structures that reflect the  dynamics of the European market and not simply borrow from the US market.”

Working group will review CMBS’s X Factor

Class X notes represent banks’ and originators’ profits from CMBS deals after their loans are sold to CMBS vehicles. Some of these X notes have been sold to third parties, but the majority have been retained by the original banks. With a rising number of loans in default or being restructured, the result has been a shortfall of payments to note holders, while originating banks receive substantial income.

The Class X Note Working Group will try to agree a set of principles with various holders of X notes. One idea is that in a restructuring, where extra fees or margins are negotiated, these should be diverted to note holders and not the X class. Equally, following an extension to a loan, the class X payments should cease.

Working group chairman Nassar Hussain said: “In some circumstances, cashflow is reduced but the X note holder continues to receive payment, typically where there are a large number of defaults in jurisdictions such as Germany, where servicers have been slower to enforce owing to unfavourable insolvency rules.”  The CMBS 2.0 Committee will try to figure out other ways for banks to take their profit from CMBS deals.

Key players in the CMBS 2.0 initiative

Participants in the CMBS 2.0 Committee include: European Credit Management, Palatium Investment Management, BNP Paribas, Capita Asset Services, Bank of America Merrill Lynch, Barclays, Berwin Leighton Paisner, Paul Hastings, Clifford Chance.

Members of the Class X Note Working Group include: BNP Paribas, Capita Asset Services, Berwin Leighton Paisner, Paul Hastings, Neuberger Berman.

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