Investment Grade Bondholders Have Tough Questions for CMBS 2.0 (Including Proposed SEC Disclosure Rule)
In an earlier posting on CRE finance reform and market trends, I stepped back and asked the all-important questions:
- What does all this mean?
- What is the big-picture?
- Where is this going?
I offered up four perspectives, with these as the first two –
1. The Good: the “return” of the unregulated lender
2. The Bad: "extend and pretend” will continue due to more and more CRE defaults.
My third perspective is much more controversial, and probably will not receive explicit recognition nor acknowledgment by many:
3. The Uncertain CMBS 2.0: Practical and important structural challenges abound before the new CMBS (“CMBS 2.0”) will include pools of loans from multiple borrowers, in amounts that will have a meaningful impact on the CRE finance market. Challenges from the investment grade bondholder include: (i) loan level transparency, (ii) structural concerns for CMBS 2.0, and (iii) finding an effective forum to effectuate these changes.
These are just some of the challenges facing CMBS 2.0, framed from the perspective of one of two of the most important players in the CMBS structure - an imaginary or hypothetical investment grade bondholder.
From this Investment Grade Bondholder: without this player, there is no market for CMBS bonds. This player is the most “under represented” player in the CMBS industry. Here are some questions crafted with the voice of this hypothetical investor, as the industry heralds the arrival of CMBS 2.0:
- LOAN LEVEL TRANSPARENCY: Will CMBS 2.0 offer “real” loan or property level transparency, such as disclosure of modification terms for loans in special servicing; or rent rolls and operating statements for performing loans?
- Servicers tell us that the Investor Reporting Package (IRP) [download guide; download version 5] contains information sufficient to our needs; will you tell this to our accountants and make them go away; and to the SEC as it seeks more transparency from us in our reporting? (This is all about information . . . data that we need.)
- Speaking of the SEC, have you seen the proposed SEC rule [download a summary] that will require the disclosure of specific loan-level data, at securitization and then during the life of the pool? Does the scope of the proposed rule address our needs? We're going to look into this . . . . (In a future posting, I'll cover the struggle between the servicers and the investment grade bondholders over loan level disclosures, which now comes under public scrutiny with the SEC's proposed rule. The proposed SEC rule is called a "tectonic event" and a "tsunami" by a group working on industry-wide data standards.)
- Who were the investment grade bondholders on the IRP committee that created this report?
- Does the IRP “match up” with the pooling and servicing agreement provisions covered by my bond? (Did the attorney that drafted the PSA conform it to the IRP? We’re gong to look into this . . . .)
- We understand that CMBS loan servicers report that loan level transparency (such as giving us current rent rolls) has legal hurdles relating to privacy rights of the CMBS borrower; so, where is the legal “white” paper that shows commercial parties have implied rights of privacy; or is it really a financial concern on the part of the loan servicers? Do the mortgage documents really prohibit disclosure?
- SIMPLE CMBS 2.0 STRUCTURE (?):
- As to pools with multi-borrower loans, will these pools be the simple structures seen by us in the CMBS pools that were closed in the 4th quarter of 2009? (Simple gives us both transparency and structures that address our special servicing concerns. "Simple" does NOT look like this: download (depiction of a fairly typical debt structure from the "old" CMBS model).
- Will we have information from, and the ability to influence, the special servicer in its decisions? What will assure us that the special servicer truly is making independent decisions in multi-borrower pools?
- Who will be paying the rating agency fees; and how will the rating agency be equipped to monitor the pool going after securitization; and what will the rating agency reform look like? (Take a look at our white paper for our bottom line on rating agency reform.)
- FORUM FOR CHANGE(?): if we become active in the Investment-Grade Bondholders Forum with the CRE Finance Council, will this really be the best forum for us to champion loan level transparency, and where our comments relating to CMBS 2.0 structure will be given due consideration? If not at this Forum, then where?
These are tough questions.
- What questions am I missing from this imaginary or hypothetical investment grade bondholder?
As we envision CMBS 2.0, this is at least one elephant in the room.
If you have comments or observations, or your own questions, please post a comment
