Investors compile wish list for CMBS 2.0 bond issues

Open letter to banks lists key features buyers want to see in new issues

A group of 15 investors have drawn up a list of features CMBS bond buyers want to see included in new issues.

The investors, including AIG, BlackRock, HSBC, Lloyds, M&G Investments, MEAG and PIMCO, said the gradual reopening of Europe’s CMBS market was “a welcome development to us all. Europe needs a liquid, robust real estate securities market that all interested parties can have confidence in.”

The investors’ initiative follows last year’s publication of the Commercial Real Estate Council Europe’s Market principles for issuing European CMBS 2.0.

The points cover disclosure, fees, independence of advisers and control rights when CMBS deals default. They include:

  • Full disclosure of loan and note level documentation available to any party on request;
  • Quarterly reports based on pre-agreed templates;
  • Annual valuations, disclosed to the market;
  • All fees paid to be detailed in the quarterly servicer report;
  • Details of hedging arrangements to be fully disclosed;
  • Terms of engagement of rating agencies to be fully disclosed;
  • Borrowers to be obliged to provide a repayment plan six months prior to maturity;
  • Special servicers to have the option to sell the senior loan if enforcement takes place;
  • The controlling class to have the right to replace the servicer or special servicer and to appoint an operating adviser;
  • Operating advisers to be independent and appointed at arm’s length, with a duty of care to all ‘in the money’ noteholders;
  • Replacement servicers to be rated;
  • No ‘double-dipping’, where a special servicer receives both a restructuring and a work-out fee;
  • The ability to sack property managers without cause after a loan default, with managers obliged to transfer information;
  • Trustee discretion to be removed “as far as possible”;
  • If ‘X notes’, usually kept by arranging banks, are “considered appropriate”, they should be subordinate rather than paid ahead of noteholders.

The points have been circulated to arranging banks as an open letter with the aim of “developing consistency across future deals”, as the market for new issuance is looking increasingly promising.