Investor pressure reshapes Chiswick Park securitisation

Deutsche Bank manages to sell first publicly marketed CMBS in nearly four years, but investors force concessions on controversial X notes

Deutsche Bank made key eleventh-hour changes to the structure of its Chiswick Park securitisation after coming under pressure from investors. The investors, which included M&G Investments, asked for changes to the class X and the control valuation provisions in the DECO 2011-CSPK deal, after this month’s publication of the ‘red’ offering circular setting out the structure.

Six months after the first roadshows, the deal  is due to finally close on 28 June, with all three tranches of bonds sold. It is the first publicly marketed commercial mortgage-backed securitisation for almost four years. One of the deal’s most controversial aspects was the inclusion of a class X note. Issuing and owning class X notes was the way that banks captured the “excess spread’ or arbitrage between the interest received from the borrower and the coupon paid to investors in CMBS deals.

However, they rank above other noteholders. Many investors in high-profile deals that have run into trouble, such as Four Seasons, have been furious to find the arranging bank continues to be paid while they face losses. Deutsche’s red offering circular modified the class X to make it subordinate to the other three classes, but only after the expected maturity date of 2016. Investors have now persuaded the bank to switch off the class X if any default occurs, at whatever time during the life of the deal.

“The perfect thing for investors would be that it was always subordinated, but there is economic tension from banks and their argument would be that they don’t do this for free,” one source said. “But it feels like this was a victory for investors. It means that if the bank writes a loan that doesn’t perform, then the bank’s profits are subordinated.” The source said it might set a precedent that would be useful if multi-loan CMBS deals return. “Banks would not be happy about that, but at least it starts a discussion between everyone about what is the appropriate way for arrangers  to be remunerated.”

The changes to the control valuation provisions centred on investors’ concerns about the servicer being able to waive loan covenants and how the noteholders could remove the servicer. Deutsche Bank is the servicer and special servicer to the deal. The structure has been changed so that if a large valuation fall puts the senior notes at risk, the senior noteholders would take control. This is what a lot of investors wanted and avoids out-of- the-money noteholders blocking any action.

Asked why the changes had been made so late, one source said: “Despite the sustained rally in secondary CMBS spreads, the market remains fragile underneath and it was challenging to build a strong order book. Investors therefore enjoyed a relatively strong bargaining position and were able to secure further structural improvements in exchange for their involvement.” The final pricing on the bonds was still relatively tight, at 175 basis points over three-month Libor for the AAA notes, 275bps for the AA and 375bps for the A notes. The AAA notes were just covered and the AA and A notes were oversubscribed.