2010

It’s August 6 as I write this, and the finance industry is taking a deep breath after hustling for weeks to get their comments delivered to the SEC on the SEC’s massive restructuring (pdf) of Reg AB and offering reform.  We here at Dechert had been very busy writing the CREFC comments (pdf) and I’m delighted to see that effort coming to a close (it only took 24 drafts to get to our submission).

To be clear, this is merely the opening act of what will be a protracted insect dance between business and government to settle on rules that deliver on the SEC’s goals of transparency and alignment between issuers and investors while not imperiling the restoration of a healthy CMBS market.  This process will consume the time of many of us for the indefinite future.Continue Reading And Now the Real Game Begins

Issuers, investors, rating agencies and other industry participants continue to wrestle with the fundamental changes that will come to define CMBS 2.0. Among the (many) issues raised in the "Best Practices" guidelines issued by CREFC during June’s get-together was a proposal for market-wide, programmatic change to the package of representations and warranties given by securitization issuers. Specifically, investors are calling for the formulation of a market standard list of reps and warrants, and for a standard procedure for receiving any deviations on a deal-by-deal basis. One would hope this would sate the appetite of the investing community – a community ravenous after being starved of ground lease exceptions and knowledge qualifiers during the lean years.Continue Reading Industry Considers CMBS 2.0 Rep Package

If there’s a worry bead left to worry, hold it in reserve for Basel III. Basel III (its informal name – it’s actually a patch job on the never really fully implemented Basel II) is the most recent effort by the Basel Committee on Banking Supervision to fix the worldwide financial system. I am far from a master of the nuances of this enormous regulatory undertaking, but I know enough to be worried. As a friend and colleague said, “if the only right answer on Jeopardy to ‘What is Basel?’ were ‘a delightful walled medieval city,’ we might be better off.”

Basel II was never fully implemented, certainly not in the United States. While Basel II generally resulted in a significant relaxation of capital requirements for most lending activities, (that worked well, right), it stipulated that many types of commercial real estate loans warranted uniquely higher capital changes.  These loans, called High Volatility Commercial Real Estate or HVCRE, include acquisition and development loans, construction loans and loans to sectors deemed by the applicable regulators to have higher risks of default and greater loss expectancy.  As Basel II was never implemented here, these CRE rules never really bit.
 Continue Reading Basel III: Big Deal or Not

Among the most followed business stories of last week was the humbling admission from Apple that the iPhone 4g included a “totally wrong” formula for calculating the number of “reception bars”. Apparently the phone works, just not if you’re holding it (something now known as the “grip of death”). The immediate, virulent, nerdy but surprisingly sophisticated response by iPhone consumers to the glitch – a youtube search reflects more than 400,000 videos posted about the three-week old product – is reflective of the enormous importance of wireless computing in our culture. Blackberrys, palms, iPads, iPhones, smartphones and netbooks are critical business tools for millions – and, as anyone that’s ever lost their Blackberry signal during a conference call can tell you – users’ expectations are for information access that is cheap, consistent and unlimited.

In the real estate market, this demand is manifesting itself through continued growth of data centers as a stable asset class for real estate developers, investors and lenders. Data centers are facilities used to house computer systems, servers and components. My IT guy tells me it’s where the internet is actually located (sort of). Design necessities – including HVAC, fire suppression, security systems and (especially) power supply considerations – drive exceptionally high construction costs. Environmental concerns among image-conscious corporate tenants are driving builders to produce “green data centers” (i.e. low carbon, energy efficient) – one of the fastest growing sectors in this niche. But with reports of demand outpacing supply by 3-4 times, these properties are being built – and that requires capital.Continue Reading Demand Drives Data Center Growth

Back from vacation … The sheer joy of re-engagement cannot be captured in words.  But, can there be a better way of restarting than perusing FinReg?  Being the parochial structured finance lawyer that I am, I start with Subtitle D with the Potemkin village-like name of  "Improvements to the Asset Backed Securitization Process" and Section 13, which is the Proprietary Trading or so-called Volcker Rule provisions.  I’ve got some thoughts.

Let’s start with the improvements to the securitization process.  The good news, as I’m sure everyone knows by now, is that some sensible asset class-specific provisions for commercial mortgages were included in the risk retention language.  More flexibility in sorting out what alignment of interests ought to look like.  Included was the notion that a B piece buyer could meet the retention requirement as could really good reps or underwriting.

The bad news is, just as in almost every other corner of this massive regulatory exercise in political self-indulgence, all the tough and important issues have been kicked down the road to the “Regulators”.  The scope of that delegation is breathtaking.  The regulators have been invited to sort out what is and what is not risk retention (vertical strip, horizontal strip, L strip), what is the “credit risk” for which 5% must be retained, what are good hedges and bad, what is the minimum hold period for risk, what is high quality underwriting, and what appropriate risk management practices of securitizers ought to be.  Wow!  They can do all that?  We won’t have to think at all.Continue Reading Securitization Survives Round One

The push for covered bond legislation – left on the cutting room floor when Fin Reg. was finalized during a marathon session last week (or should I say finalized subject to Senator Scott Brown’s continuing review) – is coming under renewed discussion by Congress (led by Representative Scott Garret) and the FDIC.

The FDIC balked at the proposal that was to be included in the Dodd-Frank bill because of concerns about the effect of certain collateralization requirements on failed banks’ balance-sheets. Covered bond terms can require issuers to replace weakening collateral upon the occurrence of certain triggers; in a receivership scenario, this re-collateralization requirement would force the FDIC to re-deploy quality assets to serve as bond collateral and shift the risk of loss of declining collateral from bondholders to the government. The FDIC hates when that happens.Continue Reading FDIC and Congress Renew Covered Bonds Discussion

Dechert has assembled a team to cover the latest legislative and regulatory developments affecting the CMBS, RMBS, and ABS markets. Each Dechert Securitization Update provides timely information on these developments. For a discussion of several recent legislative and regulatory developments that will shape the future of the securitization markets, please see the latest Securitization Update…