(When we attend industry conferences, we bring you along by blogging on topics of interest to us, with our comments of course. This is the second in a series of posting relating to, and from, the 2010 CMSA January Conference. [Link to first posting] Our blogs on other conferences are found [i] under the "Market Trends" category in the archives on the right side of the page, or [ii] by a word or phrase search on the right side of the page [suggested search terms: looking glass; scorecard; pond].)
It has been a very interesting day. The first session started at 11a and ended at 5:30p. As you'll note below, the sessions covered a wide range of topics: from "how" investors may find loan level information to an update on financial reform from a US Senator.
Here are the highlights (with some commentary, of course).
CMSA INVESTOR REPORTING PACKAGE ("IRP") COMMITTEE
This committee works on the reporting package furnished by loan servicers to CMBS bond holders. With the onset of this horrible CRE market, the bond holders have been complaining that the loan servicers are NOT giving them sufficient loan level information in the IRP. The IRP Committee is tasked to work on establishing best standards for the IRP. Consequently, it is an important committee, but appears to be stuck between the bond holders (who demand more information in the IRP) and the loan servicers (who anticipate changes in the CMBS model, and do not want to incur the costs of implementing new IRP content). Hopefully, in the near future, the CMSA's new "Forums" will give them much needed guidance for this important work.
With this background, here are the high lights of the IRP Committee meeting:
- the Committee has a working draft of an "Introductory Guide to the CMSA Investor Reporting Package (CMSA IRP), which will be posted on the CMSA website in the next 3-4 weeks. This guide is intended to help bond holders locate information. (Comment: It should be helpful. However, bond holders are seeking information outside of the scope of the IRP.)
- the Committee is working on standards for disclosing indebtedness of borrower or of its owners (other than the first lien mortgage created for the benefit of the CMBS pool).
- the Committee is forming a task force to indentify information required to be part of the IRP (pursuant to the typical Pooling and Servicing Agreement) but currently is NOT part of the IRP (Comment: if you're a bond holder wanting more loan level information, then I suggest that you contact the CMSA and join this task force).
Note that the Committee appears to be on a brief hiatus, as it takes a pause pending guidance from the two member "Forums" described below.
NEW "FORUMS"
In order to facilitate better communication within the CMSA between the various business interests, the CMSA is creating "forums." The Forums are intended to educate Forum members on topics important to the Forum, and also to advocate for the particular business interest within the CMSA, the larger industry and the larger political process. (Comment: this is a very, very wise move by the CMSA. It should avoid what some call "tranche warfare," which is where the senior bond holders assert that the special servicer is NOT taking action for the benefit of ALL classes of bond holders.)
INVESTMENT GRADE BOND HOLDERS FORUM
Three examples were given of "where" the investment grade bond holder would benefit from a "forum" process that would focus on the following –
- New investor-friendly practices for newly created CMBS issuances, such as these: out of money interest accrual should not prime principal; special servicing decisions must employ market rates of return; change of control should be based on realized losses plus appraisal reduction amounts; and much better loan-level disclosure can be delivered and are needed.
- Loan resolution practices by special services, such as these: loan resolution policies and servicer reporting procedures that are in the best interest of investment grade bond holders (such as data transfers); what are special services doing, and why; and how can loan resolution practices of investment grade bond holders be implemented for legacy CMBS (Comment: one special servicer noted that his company has extended over 97% of all loan maturities. Thus, creating what he called an "extension pile-up.")
- Selling REO with financing from the REMIC Trust, such as these: special servicers and the Real Estate Roundtable are advocating this before the US Treasury, without input by the investment grade bond holder; and could this change existing pooling and servicing agreements
SERVICERS FORUM
The following was articulated as challenges facing CMBS loan servicers:
- Change from high growth (legacy CMBS model) to shrinking portfolios (in the absence of legacy CMBS model)
- The impact of the current credit environment on special servicing operations (Comment: one servicer noted that they have extended @ 50% of loan maturity defaults if the borrower presents a viable plan.)
- Address investor demands for more information and transparency. (Comment: pooling and servicing agreement requirements need to be examined, including sharing resolution business plans with investors.)
- Future growth opportunities and challenges (Comment: one loan servicer commented that CMBS would NOT drive growth during the next 12-36 months.)
- New servicing business models (Comment: one loan servicer commented that the "new" CMBS [referred to as "CMBS 2.0"] would look like loan syndications.)
- Similarities and differences of different investors
INVESTORS FORUM
This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).
The meeting time was devoted to a survery of the 250+ people in the room. Here are some of the responses:
- 45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
- with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
- 43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
- 69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
- for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
- 58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)
In my next posting, I'll cover the session titled "Lessons From CMBS 1.0: The Wonder Years" and then summarize some interesing comments made to us by Senator Bob Corker (R-Tenn), who is a member of the Senate Banking Committee.
If you have any questions or comments, please post your comment below.
