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CRE Finance World, Winter 2012

Mixed Implications of the Super-Senior Structure; Public Deals Face Uncertain Compliance Costs the reason for doing so is that risk retention requirements would be •Sufficient demand from qualified investors. A likely key reason mandated by Dodd-Frank regulations. Indeed, all CMBS deals would issuers were happy to simply rely on the private market was the eventually need to comply with these new retention regulations fact that they had no problem finding ample demand for their when they are finalized. private placements. Deals were usually over-subscribed. There was no pressing need to tap a broader investor base. •Periodic Reporting. This is another shelf eligibility requirement that the SEC dropped in its re-proposal because it is dealt with •Additional information for investment-grade investors. Senior in Dodd-Frank Act (section 942(a)). The Act mandates ongoing bondholders liked the additional information available in private reporting for registered ABS offerings. transactions. Issuers Did Not Feel Pressured to Tap the Public Market •Liability more limited in private deals. Private deals expose issuers Although most of the new requirements for doing public deals have to less liability compared to public deals. The additional liability not become effective yet, the additional potential regulatory burden exposure in public deals carries costs that issuers preferred to of going public has probably played some role in delaying the avoid until now. resurgence of the public CMBS market until now. Still, reverting to public deals always seemed a question of “when” rather than But as we discussed above, the potential for greater liquidity and a “if”. Historical data confirms that almost all conduit/fusion deals broader investor base finally tipped the scale, and pushed issuers until 2009 were public. Most of the historical private issuance was to tap the public market. actually done for floating-rate or single-borrower deals, according to Commercial Mortgage Alert’s database (Figure 2). It is still difficult to assess to what extent the new regulatory re- quirements would suppress such public issuance. This is especially Figure 2 the case as major components of the new regulatory framework — Private and Public Historical CMBS Issuance ($ Billions) Reg AB II reform and Dodd-Frank risk retention regulations — are not even finalized, let alone effective. The DBUBS deal pricing hardly provides a good case-in-point to assess public deal costs and benefits. Because the deal also re-introduced the super-senior structure, it is very difficult to isolate any public issuance “premium” embedded in pricing. With more public deals down the road, and better clarity on the compliance burden, the market may get a better sense of the costs and benefits associated with such public deals. Regulation AB II Re-proposal Because the Reg AB II framework will play an important role in determining public issuance costs, it is important to follow the developments on that front. The SEC re-proposed several Reg AB II rules for public comments on July 26, 2011. The comments were due by October 4. Importantly, the re-proposal changes the new shelf eligibility criteria that the SEC originally proposed in April Note: Agency and ReREMIC deals were not included in this analysis. 2010.3 Figure 3 summarizes the criteria changes. Sources: Commercial Mortgage Alert and Citi Investment Research and Analysis Figure 2 also shows the familiar fact that all CMBS 2.0 deals, with the exception of the last deal, were private (144A deals). Beyond the regulatory burden, there were several other reasons issuers were not quick to re-introduce public deals: CRE Finance World Winter 2012 56


CRE Finance World, Winter 2012
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