Working party favours less responsibility for note trustees if deals sour
Servicers and special servicers should have more power, and note trustees less in future securitisations, a working party on CMBS 2.0 is set to report.
The suggestion is part of a package to be unveiled soon by the Commercial Real Estate Finance Council Europe.
Speaking at this month’s Global IMN ABS conference in Brussels, Mark Nichol and Charles Roberts of the CREFC working group said servicing and special servicing had been a big topic in the discussions.
“Some bondholders want to be incorporated when deals go bad instead of servicers,” said Roberts, a partner at law firm Paul Hastings, who last year advised Deutsche Bank on the first two publicly sold CMBS deals since the credit crunch, Chiswick Park and Merry Hill.
Nichol, a Bank of America Merrill Lynch research director, added: “But servicers shouldn’t be overburdened with restric-tions; they should have lots of responsibility and probably additional powers to interact with borrowers. We will recommend note trustees have less powers to act and [those powers] go to servicers [instead].”
The working group looked at CMBS deal structures and practices to identify problem areas since some deals went bad after the credit crunch. Roberts said disclosure needs to be better in offering circulars. “[Investors’] biggest complaint is that disclosure here is worse than the US,” he told delegates.
Certain borrowers resist disclosure, while some offering circulars don’t even contain the underlying loans’ interest rates. Some documents can only be viewed in the deal’s country of issue, often Ireland, while others are never made available, Roberts said.
The recommendations look set to reject class X notes – the excess interest spread previously paid to originating banks, which they usually receive ahead of noteholders when loans default and the “valuing out” of the controlling class in deals.
The working party, headed by Brookland Partners’ founder Nassar Hussain, is distilling a 100-page document into a first draft of around 15 pages, which will be circulated to the CREFC Europe membership by August. At the conference there was pessimism about the prospects for a CMBS market recovery.
Speakers said CMBS and the wider asset-backed securities market may be hit by Solvency II regulation making it costly for insurance firms and pension funds to hold structured bonds.