The first de-linked European CMBS since the start of the financial crisis will be viewed as a standard for future CMBS deals. Clarification on the role of servicers and bondholder meetings are especially helpful.
DECO 2011 – CSPK, issued by Deutsche Bank, closed on June 28. Banks will be keenly watching its revival ahead of restarting their own programmes.
“I’m not sure it’s turned out to be quite the success the market had expected once they’d heard it had launched,” said Brad Duncan, general counsel at Citibank.
“When people start doing these deal in a few years, I think they’ll look to the deco deal as a standard,” he said. “Now you’d have to do at least what they did in Deco to put together a deal.”
Conor Downey, partner at Paul Hastings, lead counsel on the deal, thinks it has been a greater success than many in the market had anticipated.
“It was always felt that Europe would be slower to open than the US because new investors had to be found,” said Downey. “A lot of people were saying that it was too early and that the deal wouldn’t be able to find investors or that it if did it would end up costing more than the equivalent bank loan would.”
According to Downey, this was not the case.
When structuring DECO 2011-CSPK, Deutsche Bank aimed to improve upon previous European CMBS. Lessons learnt during the crisis informed these improvements.
Servicing has been one of the major problems in CBS transactions in recent years. Until now, servicing standards used have not been specific enough and not conducive to a servicer taking action in a downturn.
“There were some ambiguities about the role of servicers,” said Downey. These include whether a servicer could call a bondholder meeting and whether they could form an ad hoc committee.
In DECO, legal counsel clarified these points and provided specific permissions in certain circumstances.
DECO puts in place certain mechanisms in relation to the servicer which allow it to make decisions more easily and mechanisms that allow it to consult with the other parties and noteholders to try to reach a decision. “Historically this has been left until the last minute because, frankly, nobody really knew what they were supposed to be doing,” said one lawyer.
The Class X note was a particular concern. “The infamous class X note reared its ugly head and the investors didn’t like the Class X structure and they insisted on changing it,” said Duncan.
Issues surround the fact that the note was included as a senior position, not a junior loss-absorbing position.
According to Downey, the changes the investors required do not provide enough protection for different banks wanting to do these deals and this will have to change in the future. The banks accepted it as the price of getting the deal done but they would have preferred a better structure of class x note.
A template for the future
Downey conceded that there were areas in which he would have like to gone further.
This includes protection for servicers. “We wanted to go further and give them more protections against liability,” he said.
Although servicers are given indemnity, this doesn’t cover negligence and counsel on the deal felt that standard is too low.
“To say that you’re liable for negligence isn’t really protective enough of the position of servicers and that can give rise to servicers feeling that they shouldn’t act because of their liability,” said Downey. “We still need to improve on that.”
Other areas that could have been improved further are bondholder meetings and voting procedures.
“We think we went a long way on that but initially our starting position was even more aggressive. We wanted even shorter notice periods and even more simple procedures,” said Downey.
The experience over the last few years has been that it’s necessary to get the bondholders involved more frequently than people had anticipated.
This was particularly the case when transactions were coming up to their maturity date and it was necessary to extend them. Bondholder votes were required for this.
“We wanted to have a process where bondholder meetings could be summoned quickly and easily,” said Downey. “Obviously we didn’t want to prejudice bondholders by making it too easy to pass resolutions that might adversely affect them, but we wanted to make sure that there was a very transparent way of doing this.”
Market sentiment seems to imply that DECO has set a precedent and a minimum standard that must be adhered to. “There are still market issues and uncertainties which will have to change but this transaction will be the starting point for people going forward,” said Duncan.
According to Downey, Deutsche Bank looking to do two more transactions this year. Morgan Stanley and Goldman Sachs would also like to do transactions if they can. “The appetite is there, there’s huge competition among banks for prime loans.”
Downey believes that this will be popular with banks, subject to certain modifications. “My expectation is that the majority of concepts that were introduced in this transaction will survive, in prototype form.”