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CRE Finance World, Autumn 2012

The Role of the Operating Advisor in CMBS 2.0 The Debate Meanwhile, it is up to bondholders, B-piece buyers and issuers, Investment grade bondholders generally desire a stronger OA from with input from servicers and OAs, to decide how the OA role can the initial closing of a securitization. They argue that rather than best be structured to properly balance control and transparency, waiting for the onset of a control termination event, the special maintain efficient servicing decision making and increase confidence servicer should be required to consult on a non-binding basis with in the CMBS product and industry. the OA about the resolution of every specially serviced loan and other major servicing decisions and that the OA should be producing 1 Under CMBS 1.0, the term “operating advisor” typically meant the a report assessing special servicer performance for every year in controlling or directing holder representative. That role should not be which there is a specially serviced loan. Some have also proposed confused with the OA role discussed in this article. that the OA have the right to recommend the replacement of the 2 The OA has generally not been introduced into agency CMBS securitizations. special servicer from closing rather than only after a consultation termination event if the special servicer is not performing its duties as 3 Such as release or substitution of material loan collateral, waiver of required under the PSA in accordance with the servicing standard. due-on-sale or due-on encumbrance requirement, certain property Opponents argue that unless and until a control termination event management changes, determination of acceptable insurance default, incurrence of additional borrower or mezzanine debt, release of material occurs, the introduction of a third party into the decision making escrow amounts and determination to bring a property into compliance process for the resolution of specially serviced loans would interfere with environmental laws or address a hazardous material condition. with, and fundamentally alter, the bundle of rights the B-piece holder is entitled to when it purchases the first loss position, 4 Depending on the issuer, a control termination event may also be including the right to appoint and consult with the special servicer referred to as a control event or a collective consultation event (because and approve special servicer resolution strategies and other major the special servicer is required to consult with both the B-piece holder servicing decisions. Further, opponents maintain that without “skin and the OA). in the game” and significant CMBS workout experience, the OA 5 Depending on the issuer, a consultation termination event may also be should not be second guessing an experienced (B-piece) investor referred to as a senior consultation event. and CMBS special servicer. Finally, they say that investors can vote with their wallet and abstain from purchasing or trading into positions 6 The appraisal reduction calculation is used to determine whether a in pools where a particular buyer has bought the B-piece or a control termination event exists and the net present value calculation particular special servicer has been appointed. is used in evaluating alternative resolution strategies to satisfy the servicing standard requirement to maximize the recovery of principal Conclusion and interest on a present value basis. The OA role is not currently structured to provide proactive monitoring 7 An asset status report generally includes property information, asset status of special servicer actions relating to the resolution and liquidation summary, third party reports, asset operating information, alternative of specially serviced loans until a control termination event occurs. courses of action and a resolution plan prepared by the special servicer. If proposals from regulators were to be enacted in substantially Prior to a control termination event, an asset status report is “final” if the form presented in draft, it would create an expanded role for the controlling holder has approved (or not disapproved) it within 10 days the OA from the securitization closing date, however, it is unclear of receipt. what the new regulations under Dodd-Frank will actually look like. 8 Since mid-2011, there has been significant OA fee rate compression. CRE Finance World Autumn 2012 50


CRE Finance World, Autumn 2012
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