Debussy’s composition is transparently better


Dan Boakes

Boakes, Dan 09.13

In July, Situs Asset Management was named servicer and special servicer for the £263m Debussy DTC CMBS on the Toys R Us UK portfolio. The closing of the Debussy deal was a significant step for the CMBS market, as the first non-bank arranged issuance – Cairn Capital was the arranger – since the global financial crisis. It also marked the first European securitisation since the downturn to be secured by assets in secondary locations, a factor reflected in the expanded servicer duties and liabilities. 

In examining the primary servicer’s role in this deal, there are many differences in the responsibilities for the parties involved, due to today’s requirements for greater transparency. In the past, the servicer typically had a liability to the issuer acting through an appointed note trustee and corporate service provider.

In the Debussy deal, the degree to which investors will monitor the servicer’s activities, via quarterly reporting or the servicer’s dialogue with the operating adviser, will help to minimise the likelihood of challenges to the servicer’s decisions.

If the servicer is seen to have breached its obligations and the note holders suffer a loss, they will have a direct right of action against the servicer, rather than having to channel claims through a note trustee or corporate service provider. This higher level of transparency will help bring more liquidity to the CMBS market, with investors being able to more clearly understand what it is they are buying.

Situs sees a servicer’s and special servicer’s job as facilitating a smooth relationship between a borrower and its finance provider. An ability to analyse issues from a property, loan and securitisation level is important as it enables a servicer to achieve this goal and act more efficiently, without involving a multitude of parties in key decisions. Situs recognises this direct responsibility to note holders, just as it would to a syndicate of balance sheet lenders whose loans are serviced.

As well as providing greater transparency and accountability than typical CMBS deals, the Debussy servicing arrangements give the servicer and special servicer responsibilities to ensure that they can interact more directly with investors when making key decisions. This level of transparency will help bring more liquidity to the CMBS market, with investors being able to more clearly understand what it is they are buying.

Loan and bond level reporting requirements have become more closely aligned, allowing information to be passed to investors more quickly. The importance investors attach to reporting is shown by the fact that the servicer’s appointment can be terminated if reports are incomplete or overdue for reasons that ought to be within a servicer’s control. Furthermore, if a loan becomes stressed, the servicer or special servicer is obligated to explain its rationale for agreeing to any standstill or for implementing a particular recovery strategy.

While the servicer or special servicer may at times require expert support, the servicer has less scope to rely on third-party advisers than in the past. Investors will be entitled to full disclosure as to the nature of the relationship between the servicer and any third-party advisers, including any fee arrangements.

Investors have shown a keen interest in preventing ‘double dipping’ – servicers collecting fees from the trust cashflow as well as the borrower – which has been synonymous with past deals. In the Debussy deal, the servicer is paid a reasonable fee for the additional responsibilities and liabilities.

There are also new measures to protect special servicing fee levels. For example, if a loan work- out returns a defaulted loan to a ‘corrected’ status and the loan subsequently defaults again, fees earned after re-transfer to special servicing will be net of any work-out fee attributable to collection of interest receipts during the ‘corrected’ status period.

The above example applies when identifying the nuances between past transactions and the Debussy 2013 deal. Hopefully some of these flexible, innovative new structures will enhance reporting and transparency and instil confidence in the market, enabling the financing of other challenging property asset classes in due course.

Dan Boakes is director of servicing at Situs Asset Management