CMBS 2.0 ‘Can’t Stay Simple’

NEW YORK CITY-Even as the Wall Street Journal reported Wednesday that major banks including JPMorgan Chase and Goldman Sachs are ramping up their CMBS operations on their way to selling as much as $10 billion of the bonds this year, a panel of real estate attorneys noted that the relaunch of securitization has thus far been relatively plain-vanilla. However, cautioned Charles Roberts, a partner in the corporate department with Paul, Hastings, Janofsky & Walker LLP, “It can’t stay simple.”

For one thing, said Roberts and his Paul Hastings colleagues during a media briefing at the firm’s Midtown offices, lenders will gradually regain their appetite for more complex, and perhaps more risky, transactions. For another thing, no clear consensus has emerged on the relationship between senior bondholders and B-piece buyers as the so-called CMBS 2.0 gathers momentum.

At present, said Ronald Lanning, of counsel in the firm’s corporate department, new-issue CMBS transactions hew to one of two basic models: the old-style arrangement whereby the B-piece buyers reserved the right to appoint a special servicer and deals in which that right falls to holders of the uppermost tranches. The question remains whether enough B-piece buyers will be willing to enter CMBS transactions with fewer rights.

Even so, the London-based Roberts said, “Europe is far behind the US” in restarting the CMBS market. There have been a few securitized deals lately overseas, but these have been single-tranche, generally tied to the credit of tenants. Accordingly, the US has also excelled Europe in dealing with the fallout from the market’s downturn, said global real estate chairman Philip Feder. 

Of course, looming over the CMBS revival is that mountain of fallout, and it’s not yet clear whether the market for newly issued CMBS will reach capacity fast enough to provide relief. “What you had in the US was thousands of community banks going bananas, making risky loans,” Feder said. “That has come back to haunt them.”

Loans from those smaller lenders represent a fair share of the $1.4 trillion in commercial mortgage debt that will mature by 2014. Yet Lanning said it’s too soon to call where any of those banks, or specific property-level loans, will be by the time the due date arrives.

The long-term prospects for a loan being successfully refinanced, or a given lender being in good enough shape to take a writedown on several distressed loans in its portfolio, are still “evolving,” he said. Macroeconomic forces will play a part at both the property and lender levels.

What is certain at present is where lenders are focused: on top-tier properties in key markets, e.g., class A office buildings in New York or San Francisco. In keeping with the stricter underwriting and tighter debt-service coverage ratios lenders currently go by, properties with a “story” attached, or those in secondary or tertiary markets, are challenged in obtaining debt, said Lanning.

At least that’s the case for now, he added. It remains to be seen whether CMBS issuers, investors, ratings agencies and other parties will long remember the lessons learned from the years of irrational exuberance, when lenders even signed off on a few loans with a DSCR of less than 1.0x.