In May 2011, the CREFC Europe established a committee which will issue a set of Industry Best Practice Guidelines for the new issuance of European CMBS. The background for the committee is as follows:
Funding Gap
The Commercial Real Estate funding gap and debt refinancing wall means that there is a need for an alternative source of debt funding, which can potentially be filled by the CMBS new issue market
Weaknesses in Historical Structures
In order for CMBS to again become attractive to investors, amendments to the way deals are structured will need to be made in order to avoid the weaknesses that were exposed during the recent crisis and also to simplify (and where possible, to standardise) structures
Single Source of Guidance
The CREFC Europe will use the expertise of its members to produce a comprehensive set of best practice points, rather than wait for individual issuers to address structural issues in an ad-hoc manner.
The CMBS 2.0 Committee will work alongside other committees in the CREFC Europe, such as the Lender Committee and the Servicer Committee in order to provide a comprehensive and consistent view. CMBS 2.0 Guidelines are expected to be published by June 2012
European CMBS 2.0 Committee Working Groups
Pre-Issuance Disclosure Working Group
To form guidelines for pre-issuance disclosure in offering memoranda including conflicts of interest, rights of Junior lenders and access to underlying documentation (both pre and post issuance) and, related to this, standardised and updated version of representations and warranties (principal/agented deals).
Excess Spread Structure Working Group
Excess Spread / Profit Extraction Structure for Originating / Arranging Bank (e.g. Class X, retained interest, deferred interest, skim both at bond and loan level etc) – ranking, impact of restructurings, triggers to switch off based on expected rather than crystallised losses, appraisal reduction type structure on default.
Improved Investor Reporting Working Group
The Working Group will verify ways to improve and standardise investor reporting and enhanced loan and property surveillance and ensuring both lenders and borrowers are incentivised to build this into the underlying loan documentation (regulatory and other requirements). This group will liaise with the CREFC Europe E-IRP and Lender Committee on respective guidelines and standards.
Transaction Structure Features/Issues Working Group
- Standardisation of Control Party (& Operating Adviser) and Junior lender rights with effective appraisal reduction
- Standardisation of Noteholder Voting Rights
- Preferred Hedging Structures (risk of long dated structures, Issuer/Loan level)
- Optimising Transactions Structures for less Creditor Friendly Jurisdictions (off-shore companies with share pledge, off-shore reserve accounts)
- Liquidity Facilities - Availability, improved and standardised appraisal reduction mechanism, alternative forms of liquidity
- Asset and Property Management – Improved ability to terminate; performance assessment; independence from sponsors
- Synthetic Securitisations – Are they fundamentally flawed? Servicing; Restructuring Credit Events
- Valuation Standards, Standardised Instruction Letters and Reliance/Addressee Issues
- Loan Documentation in conjunction with CREFC Europe Lender Committee
Servicing & Transaction Counterparty Roles Working Group
The role and fees of the Primary Servicer/Special Servicer, standardisation of the Servicing Standard (NPV, loan level/note level, who else is covered?, synthetic deals etc.), standardisation of the level of Servicer discretion (increased discretion, improved indemnities, accountability) (How can these be improved/enhanced?).
Investor Identification Working Group
The Working Group is to verify an investor identification / register of investors’ process which will be available to official transaction counterparties. In addition, will verify if there is a need for a new potential role of a Noteholder representative.