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The A Piece Strikes Back

By Erika Morphy

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A Goldman Sachs and Citigroup $788.5 million CMBS attracted more interest than many in the market had expected, according to news accounts.

There was a lot to like about this offering - even if you weren’t actually buying. Without a doubt it is a big boost for the capital markets: one of the largest CMBS to date, it had five-classes of investment-grade and high-yield classes backed by 48 properties, largely retail. Just as interestingly the transaction provides yet another glimpse into the so-called CMBS 2.0: the next generation of these securities expected to emerge that supposedly will correct many of the last cycle’s defects. In this transaction, the controlling rights on the servicing of the bond are to go to the triple-A holders, Dow Jones reports.

This issue of control has turned out to be a bigger problem than expected for senior tranche CMBS investors in some cases. Typically, when a CMBS loan goes into default, a highly formulaic resolution process is launched with the special servicer selected by the junior note holder, or B piece buyer. Thus a natural tension arises - once considerably worsened in the last 24 months - when the special servicer must decide what action to take: AAA investors would prefer for loans to be liquidated as soon as possible so the structure can pay down quickly. The B piece buyers would prefer to hold on and hope the borrower will make the deal whole again.

The roller coast recession added even more confusing plot lines to this story: in some instances it was feared the control structure of the CMBS workout would shift if the controlling class’ balance was reduced by 75% through appraisal reductions or losses. Then the control rights flipped to the investment grade note holders - a completely new paradigm. Until with this latest deal.

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