2011

Writing from the Acela again, en route to Back Bay Station after a short trip to New York to attend a CREFC After-Work Seminar we hosted. The space at our Bryant Park offices was full – I took a seat in the last row next to interim CEO John D’Amico (he seemed really pleased with the turnout). The meeting was the latest in a series of after-work seminars that CREFC is holding throughout the country (next stop is Dallas). The topic – “A Case Study in Lending from the Perspective of Both Portfolio and Conduit Lenders” – was moderated by Whit Wilcox (HFF) and included panelists Michael Shields (ING Real Estate Finance), Mike Doyle (CIGNA) and Schecky Schechner (Barclays Capital). The panel explored their thinking on loan applications from the perspective of the three corners of the CRE banking world – life insurance companies, bank balance sheet lenders and CMBS conduit lenders.Continue Reading Dechert Hosts CREFC After-Work Seminar

As the CMBS market begins to get its feet underneath it, a number of folks have begun to pine for the public markets. Since 2009, every CMBS deal has been issued as a 144A (or otherwise privately placed). The public market is beginning to feel like a memory. While there seems to have been relatively robust demand for product, a number of bankers say that demand is still somewhat constrained in the 144A institutional market place. They fondly remember the benefits of the public market: liquidity, better pricing, a wider investor pool. As the market rebounds, these bankers suggest that it may be time to dust off the shelves.

And so we thought it would be useful to revisit that bid and ask. For this purpose, we’ll assume that the hypothetical banker is right and that there are significant benefits to be obtained by reanimation of the public deal zombie. That’s the bid.

Here’s the ask. First, there’s that pesky little liability issue. The liability exposure for bankers and sponsors in the 144A market is less than in a public (registered) deal. No liability under Sections 11 and 12 of the Securities Act. That liability is generally pretty absolute (as to non-expertized info) subject only to a diligence defense. Liability in the private market is limited to 10b-5. The need to prove scienter and reliance in a 10b-5 action is a significant burden for an aggrieved investor. The difference in exposure to liability is a distinction not to be sniffed at. Yes, of course we always mean to get the disclosure right. But the underlying assets are complex and there’s an undeniable hunger among the plaintiffs’ bar to “discover” disclosure defects where honest folks, acting in good faith, thought adequate disclosure had been made. (Note also how much more ominous the enhanced liability exposure in public deals will be after FinReg and its progeny become law. As disclosure gets more complex and elaborate, the opportunities to stumble into liability grow exponentially.)Continue Reading So You Really Want To Do A Public Deal?

Last Thursday evening, Dechert partners in our Finance and Real Estate Group and Bankruptcy, Business Restructuring and Reorganization Group hosted a cocktail party for our clients at our New York office.  The main item on the agenda for the evening was simply to take the opportunity to learn more about what’s on the minds of our clients and to discuss the outlook for the remainder of 2011.  Also on the agenda for the night – wine, sushi, taking in the view of the Empire State Building and catching up on the latest activity in the Major Leagues.

With well over 100 people in attendance, we had the chance to hear from a wide variety of clients in commercial and residential loan origination, mortgage servicing and securitization (CMBS, RMBS, ABS and CLOs).  Across the board, I would say the mood was upbeat and optimistic.  Lending is ramping up.  Term sheets are being drafted.  Bankers are talking more about securitization as a viable take out strategy.Continue Reading Dechert’s FRE and BRR Groups Host Clients

As you may have heard, several federal regulatory agencies recently jointly issued the Notice of Proposed Rulemaking ("NPR") regarding the general credit risk retention requirements for asset-backed securitizations ("ABS") and the proposed requirements for exemptions from the risk retention requirement for certain securitizations as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Well, we now have our proposed risk retention rule. The regulator class has been incubating this egg for the better part of nine months and we’re all now well behind the, admittedly, magical thinking schedule proposed in the actual FinReg legislation. Now, I’m not complaining. Particularly having read this missive, I’m all into delay.

If you want to read the proposed rule, feel free to take your pick of announcements from the Department of Treasury, the Federal Reserve, the FDIC, the SEC or the FHFA: it’s here—the long-awaited Credit Risk Retention proposed Rule (large pdf). The Rule shows every evidence of having been written by a committee, in fact, by a committee of committees. We all know that the definition of a committee is something with more than two legs and less than one brain. A committee of committees? Need I say more?Continue Reading CMBS: The Risk Retention Proposed Rule Has Finally Been Unleashed; The Comments Begin

Earlier this month, the New York Supreme Court issued a decision upholding the enforceability of a springing recourse guaranty given in connection with a commercial real estate loan that provided for a full "blow-up" upon voluntary bankruptcy. [Author’s Note: the decision can still be appealed: New Yorkers tend to call their trial court the "Supreme Court", their supreme court the "Court of Appeals", their front steps the "Stoop" and their minor league team the "Mets".] Most of our readers are, at this point, intimately familiar with the "bad boy" guaranty and the leverage it provides a lender once the loan hits the fan. Conversely, our readers are also keenly aware of the degree to which sponsors were able to erode the scope of recourse carve outs and isolate liability in poorly capitalized shell entities during the go-go years. The most famous example, of course, being GGP’s ability to run an end-around the bad boy guaranty by filing borrowers and gurantors alike into bankruptcy in 2009 – leaving the holders of $ billions of CMBS paper without practical recourse.Continue Reading Bad Boys: New York Supreme Court Upholds Recourse Guaranty

A few weeks ago, I wrote that it was manifest destiny that the CRE CDO would return to the commercial real estate space.  A lot of people took the time to tell me that I was delusional, at best. I thought I would take a moment to return to the topic and try to establish my bona fides as something other than a knave, a fool, or a foolish knave.

Let’s start with the question of need.  Do we really need this?  Portfolio lenders in need of yield and securitization lenders in need of warehouse capacity are in a day-in, day-out search for leverage. The problem, of course, is that almost all leverage available in the commercial market tends to be short term, creating a durational mismatch against the underlying financial assets.  That situation is bad.  That mismatch killed a lot of players last time.  The CRE CDO addresses this problem with durationally matched financing.  It is also blessedly bereft of the repo mark-to-market.

So that’s the need. It’s real.Continue Reading How I Learned to Live With the CRE CDO. And Love It! (With Apologies to Stanley Kubrick)

It looks like our recap on covered bonds came not a moment too soon. Representatives Scott Garrett (R-NJ) and Carolyn Maloney (D-NY) teamed up this week to co-sponsor the bipartisan H.R. 940 (pdf), the United States Covered Bond Act of 2011. The new bill is much in keeping with the recently distributed discussion draft (examined in a recent Dechert OnPoint (pdf)). Currently, it is in committee before both the House Committees on Financial Services and on Ways and Means.Continue Reading Covered Bond Update: Rolling the Boulder up the Hill?

Recently, while visiting my in-laws, I took a break from college basketball and the Daytona 500 and caught up on the latest developments in the quest for covered bond legislation in the United States.  Not surprisingly, I quickly found that the quest for covered bond legislation is, well, still a quest.

We have discussed the possibility of covered bond legislation numerous times on this blog (see here, here, here, here, here, here, here and here).  As you may recall, 2010 ushered in optimism for proponents of covered bond legislation, as both the House and Senate at least entertained the possibility.  Representative Scott Garrett (R-NJ), who has long been a strong proponent, led the charge in the 111th Congress pushing a bill out of the House Financial Services Committee and in front of the full House for consideration.  The Senate Banking, Housing and Urban Affairs Committee even went so far as to hold a hearing on the topic.  Despite the attention, the elections and then other distractions took priority, and a lame-duck session came and went without further movement on the topic.  However, the bells ringing in the new year also rung in a new round of this fight, as all interested parties are gearing up for yet another attempt to pass this legislation.Continue Reading Covered Bond Update: Inching Closer?

Near the epicenter of the late unpleasantness was that wonder of complex engineering, the CRE CDO. It has been blamed for near everything that went wrong or was wrong in the commercial real estate space. It probably is responsible for the winters of 2010 and 2011.

The CRE CDO, as it was initially designed, was an on-balance sheet term financing facility which was designed to be free of the vicissitudes of traditional bank warehousing restrictions and, of course, the dread mark to market of the repo market. The transactions were often dynamic and had substantial term, often up to 7 years. Whole loans (as well as other stuff) which met the elaborate and complex (more on this later) eligibility criteria could be financed on a rolling basis with the proceeds from the disposition of assets reinvested for a substantial portion of the term. CRE CDO paper was customarily rated. The average cost of funds was substantially lower than what could be obtained on a straight bank facility. Continue Reading The Impossible Dream: It’s Time to Bring Back the CRE CDO