Page 24

CRE Finance World, Winter 2013

CMBS — Party Like its 2007 Back to the Future? Other Recent and Noteworthy Trends comprehensively, or consistently, addressed two issues: 1) REMIC In addition to the trends noted above, 2012 CMBS transactions (Real Estate Mortgage Investment Conduit) restrictions on modifying have reintroduced a number of unfavorable CMBS structural the CMBS trust’s coupon, and 2) a consistent approach to features and credit underwriting standards not seen since 2007. special servicing. Again, while none of these items by itself is problematic, the cumulative build-up of these items is worrisome. First, as painfully learned “With insatiable demand post financial-crisis, CMBS •Pro Forma Underwriting. Pro forma underwriting is making its from investors for yield, REMIC structures cannot way back into CMBS, particularly for non-stabilized assets. For CMBS issuers are loosening increase their coupon example, it was prominently featured in a recent $1 billion New underwriting standards during an extension period York City office transaction that was well-received by investors. to win loans in an increasingly or after a modification In this particular transaction, while the leverage attachment competitive origination (unlike a Grantor Trust points for the loan are sound, in our view, and while there are environment.” such as in GSMS 2007 good reasons for the underwritten cash flows, such as contractual EOP). This challenge rent step-ups, underwritten cash flow was 56% greater than can be addressed in the trailing 12-month cash flow; REMIC by building in contractual rate increases post maturity; we have not seen this in CMBS 2.0. Secondly, while concepts •Interest-Only Loans. Interest-only loans have been on the such as independent operating advisor are a good start, there is increase in securitizations, particularly for larger, stand-alone yet to be a comprehensive and consistent approach across CMBS transactions. While a loan can certainly be sized at origination transactions on how best to designate, select, maintain, and pay to compensate for the lack of future amortization, we believe the special servicer. that amortization is a good discipline; Silver Linings •Pari Passu Loans. Like interest-only loans, pari passu loans are In addition to the developments noted above, there have been on the rise in securitizations. To illustrate this point, there were positive trends in CMBS following the financial crisis, notably: three such loans in the recently priced GSMSC 2012-GCJ9 securitization. While pari passu loans are a convenient way to •CMBS volume has been up consistently every year and is reduce loan concentrations, they can introduce complexities in growing. New issuance creates better liquidity for the market the event of a work-out as various CMBS trusts hold participations and no one is forecasting the excessive issuance levels seen in the collateral, as opposed to the whole loan, while control rests in 2005-2007; only with one holder; •Underlying asset quality appears decent and limited to cash- •Cash-Out Loans. Increasingly, CMBS new-issue loans are providing flowing assets (no land, construction or condo loans, yet); cash proceeds to sponsors above and beyond their existing financing, thereby reducing their skin in the game; and •Delinquency rates appear to have peaked and are declining; •CRE CDO Backed by Mezzanine Debt. The rebirth of the CRE •Property fundamentals are generally improving; CDO market was established in November 2012 with the successful pricing of the RCMC 2012-CREL1 transaction. Sponsored by a •The floating-rate market has restarted and provides an important well-regarded investor, the transaction is noteworthy as a first source of capital for many borrowers; and following the financial crisis and as a tool through which an issuer is able to secure funding for its Mezzanine investments. •As noted earlier, credit enhancement levels have found a safe and secure level at the senior AAA level of 30%. Issues That CMBS 2.0 Has Overlooked While CMBS 2.0 has adopted a number of provisions that are Conclusion helpful to the CMBS investor, primarily on the credit enhancement CMBS 2.0 has introduced many new features and improvements, side, our observation is that credit standards, as noted, are loosening most notably in the more robust credit enhancement levels for as the market gains stability. We feel that CMBS 2.0 never the senior AAA securities. Issuers and investors have also been CRE Finance World Winter 2013 22


CRE Finance World, Winter 2013
To see the actual publication please follow the link above