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A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 45 restrict such action given that they would want to realise their profit at the earliest possible opportunity. Finally, given that the NPL Sponsor or an affiliate would be taking on a special servicing type role from the outset of an issuance then an investor would need to get comfortable with the NPL Sponsor’s ability to perform such a role. Clearly if the NPL Sponsor or its affiliate is a rated special servicer then this would be helpful in undertaking such analysis but this is unlikely to be always the case. Potential Sponsor Reservations From the NPL Sponsor’s perspective the main issue with an NPL Bond structure is likely to relate to those issues that are inherent in raising debt via the capital markets. Driven by their business needs or their desire to maximise value of the NPL portfolio, the NPL Sponsor may need to amend a material term of the securitised loan. In these circumstances the NPL Sponsor would not have the luxury of sitting down with a lender or club of lenders, but instead they would be at the mercy of the capital markets. To the extent that they require modifications, the NPL Sponsor would therefore have to embark on a consent solicitation process. Compared to agreeing terms bilaterally with a lender such a process could take a notable period of time, is potentially costly and unless they are able to “lock-up” individual bondholders there would be a level of uncertainty as to whether the requisite amount of bondholders would sanction such modifications. A possible solution to this, is allowing the bond issuer to retain a redemption option that could be exercised at anytime in order to collapse the structure and seize back control. Where it is likely that an NPL Sponsor’s financing requirements are likely to change with respect to an NPL portfolio, then an NPL Bond may not be the best financing tool. An NPL Bond issuance also imposes on the NPL Sponsor a variety of onerous disclosure obligations. As part of the issuance process, the NPL Sponsor would be required to disclose material facts such as key terms with respect to the acquisition of the NPL portfolio (including possibly its price), different loan strategies being considered with respect to individual loans and material facts about the operations of its business. Equally, given that the underlying credit is the underlying loans themselves, then the NPL Sponsor would be forced to agree terms with an underlying borrower to allow disclosure of material information relating to the loan including the CRE securing such a loan. Although such disclosure is viable, ultimately the NPL Sponsor has to decide whether it is comfortable or possible for such information to enter the public domain and to the extent that they cannot get comfortable, then an NPL Bond structure would be unlikely to work for them. Conclusion An NPL Bond would appear to be the perfect marriage of CMBS as a financing tool providing much needed leverage to investors in NPL portfolios. However it is likely to be a while until we witness such a marriage given the structural seismic shift between an NPL Bond structure and those CMBS 2.0 structures that are currently in the market. As the CMBS market matures and structures undoubtedly become more complex, and assuming that it can be demonstrated to an NPL Sponsor that an NPL Bond provides a cheaper form of finance compared to a traditional bank loan, then it is likely to be simply a matter of time until the European market witnesses its first ever NPL Bond issuance. Europe’s Future Power Couple — CMBS


CREFW-Fall2014 10.15.14
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