According to investors, the disclosure and information provided on European CMBS issues is generally poor. “For US CMBS you get data six inches thick – everything you want to know about the underlying property,” says Graham Page, head of credit at RZB Bank in London. Even rating agencies, who are given more data than investors, think more transparency is needed.
On European CMBS, rating agencies and investors usually receive loan-by-loan data when securities are issued. This is not the case with RMBS, which have thousands of loans as collateral, and the European Central Bank is addressing this issue.
“From a rating agency perspective, it’s less of an issue with European CMBS, which are characterised by concentrated collateral pools,” says Christian Aufsatz, Moody’s senior vice-president of CMBS ratings. “On the loan level, we usually have all the loan agreements, valuations, inter-creditor agreements and other documents. We also receive an electronic data tape at closing and can check data against loan documentation. When you analyse a portfolio of 10 loans, you need to read every loan agreement and every third-party valuation.”
But Aufsatz admits that for investors, “there are shortcomings in transparency, especially in relation to loan and transaction documentation and property reporting”. Rating agencies get this information “but we are not allowed to give it to investors – it is something the servicer or originator would have to do”, says Aufsatz. “We hear that very often, borrowers do not want their loan agreements to be public.”
Dodging data disclosure
After issuance, ongoing disclosure is poor. Industry specialists say performance data sometimes stops being provided on assets without an explanation; or loan payments cease and it is hard to find out why, how long it will last and how severe the problem is. Conor Downey, finance partner at law firm Paul Hastings, says: “Where we do have reporting packages, a lot of borrowers are not complying with them, especially in continental Europe. In a lot of jurisdictions, courts are very unsympathetic to a lender taking enforcement action other than for a real payment or insolvency default.
But for failing to provide annual accounts? Many borrowers are saying ‘get lost – sue us’.” Part of the problem is that legal regimes and lending practices vary across Europe. UK borrowers are used to a certain level of transparency and their reporting is “reasonably OK”, Downey says.
But in Germany, where domestic banks dominate commercial real estate lending, borrowers provide data on an annual, rather than a quarterly, basis. Reporting for capital market purposes is more standardised, but there is no European template.
The puzzling thing about international investment banks is that as originators, they provide far better disclosure on US CMBS. John Deacon, CEO of Giltspur Capital and member of the Commercial Mortgage Securities Association, recalls that in 2005, when the CMSA tried to improve European CMBS transparency and reporting: “We had a fair amount of resistance from some investment banks. They didn’t want to do it because it was extra work.”