Page 46

CREFW-Fall2014 10.15.14

vehicle and the NPL Lender. Finally, credit enhancement would be achieved through various hedging arrangements and the provision of a liquidity facility. With regard to the day to day administration of the underlying NPL loans, a servicer would be appointed who would also be responsible for providing reporting on such loans. However a special servicer is unlikely to be appointed to maximise recoveries on the underlying loans as this is a role that the NPL Sponsor (or one of its affiliates) is likely to expect to assume. Immediately following the acquisition of an NPL portfolio, the NPL Sponsor would deploy their expertise in maximising the value of the NPL portfolio through either restructuring or enforcing the underlying loans. In both circumstances the NPL Sponsor would look to increase the value of the CRE securing such loans through either working with the borrower or obtaining direct control of the CRE itself through enforcement. Given that a special servicer’s role is to maximise recoveries on underlying CRE loans following default, the NPL Sponsor’s active role in the transaction and it’s clear economic interest, would mean that in the case of an NPL Bond issuance there would not be a need to appoint a special servicer in relation to the underlying NPL loans — a clear deviation from the CMBS 2.0 standard. In terms of enforcement rights following the occurrence of a bond event of default, the bond security trustee would be able to take control of the NPL portfolio by enforcing the pledge over the shares in the NPL Lender. Once such control has been obtained, the underlying loans could either be sold or action taken to maximise the recoveries on the underlying NPL loans for the benefit of the NPL bondholders. So What is Holding Things Up? Despite the clear benefits of an NPL Bond and that there exists the capital markets technology to create such a product, to date there been no issuance of such a bond. This could be down to the current immaturity of the CMBS 2.0 market or there could be more fundamental issues that have caused industry participants to shy away from this product. CRE Finance World Autumn 2014 44 Potential Investor Reservations From the perspective of a potential NPL Bond investor, then they are likely to have concerns with nuances associated with the structure. One of the major criticisms of European CMBS has been the complexity of many of the CMBS structures used prior to the onset of the financial crisis. These concerns have been addressed in new issuance, which has so far manifested itself with transactions featuring the securitisation of single loans backed by prime CRE with very straightforward securitisation and loan structures. In sharp contrast, an NPL Bond would be the complete antithesis of this with the underlying collateral comprising a portfolio of NPLs secured by secondary property. The complexity with the NPL Bond product arises from the presence of multiple loans. Given these loans have not been originated or pooled together specifically for a securitisation, it is likely that many of their key payment terms (amortisation profile, payment dates, interest rate provisions and even currency) would vary and therefore have to be harmonised as part of any securitisation through the use of various hedging instruments. In addition the terms and conditions of the NPL Bonds are likely to feature complex redemption conditions as well as other structural features (non accruing interest (NAI) provisions and an available funds cap) to cater for the varying payment profiles of the underlying loans. Although none of these issues are insurmountable and there are plenty of examples of this type of structuring in the 2004–2007 vintage of CMBS notes, nevertheless getting comfortable with such a structure would constitute a huge structural leap of faith for an investor in a market where the last true multi-loan CMBS issuance was in August 2007. An investor may also have concerns with the representations relating to the collateral, given that due to the limited knowledge of an NPL Sponsor and the distressed nature of the underlying loans, the representations that the NPL Sponsor would be prepared to give are likely to be limited and at best highly qualified. Further, an investor would be wary of a significant prepayment risk with such a product caused by the underlying loan sponsors seeking to exit the loan as soon as feasible and the NPL Sponsor reluctant to Europe’s Future Power Couple — CMBS “On the face of it, the emergence of an NPL Bond would seem to be highly desirable…..for the CMBS investors, these types of deals would give them the volume, yield and variety of CMBS paper which their investment portfolios so require.”


CREFW-Fall2014 10.15.14
To see the actual publication please follow the link above