Risk Retention

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The conduit market does not absorb a lot of bandwidth in my day-to-day practice; I’m more of a CRE/CLO/warehouse/SASB/new products/innovation sort of guy.  But it’s painful to watch this marquee capital markets product wither away, a product that  transformed $200 billion of mortgage loans into securities in a single year.  That biz might limp over the finish line with a meager $25 billion this year.  What happened?  The demand for CRE leverage certainly hasn’t changed.  The CRE market has gotten significantly bigger since 2008 and consequently, the need for leverage has grown concomitantly.  The nature of the underlying real estate assets hasn’t changed all that much, nor the nature of the ownership structure, albeit it is probably a bit more institutional today than it was in 2008.  The product is no different, in large measure, today than it was back then and indeed in some minor, twiddling respects might even be better from the perspective of the borrower.
Continue Reading Can We (Should We) Try to Fix the Conduit Before It’s Gone?

Folks, last week I made the point that it’s extremely important to confront negative narratives about our industry before they take hold, creep into the interstices between things that are true and then somehow ossified into received wisdom.  So, taking on board my own advice, which shockingly I find compelling, I want to sound the alarm about a recent Wall Street Journal story concerning the misstatement of net operating income in our industry (I only wish I could qualify as an influencer here.  I read about two teens with millions of followers this weekend; they talk about stuff like..their hair.  Is there anyone out there that wants to know about my hair?).
Continue Reading CMBS On The Perp Walk: We Are Being Set Up!

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting. 
Continue Reading Beany & CECL

On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 
Continue Reading Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

We’re all just back from CREFC and the mood was broadly constructive.  (Don’t you love that word, “constructive”?  When did “constructive” become a fancy way to say “good”?)  We all went to South Beach this year wondering where the investors were, wondering whether the market was okay and wondering whether December was a blip or a coda. If the industry chatter captured the gestalt, and the gestalt is right, then while this recently strong market will surely expire at some point, this is not that point.

Amongst the frolicking in Goldilocks Land in SoBe, there were some actual issues discussed.  One of these that got some attention, at least by the wonkier members of the crowd, is the new risk retention rules out of Europe.

We’ve written about these before.  It is very much a moving target.  If you think the American rulemaking process is baroque, turgid and opaque, spend some time in Brussels. 
Continue Reading More Fun With Risk Retention: Europe and Japan Weigh In

In February, the D.C. Court of Appeals ruled in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the Federal Reserve System, No. 17-5004 (D.C. Cir. Feb. 9, 2018) (the “LSTA decision”) that a manager of an open market CLO is not required to retain risk under the Dodd-Frank Act and Regulation RR, because only a securitizer which transfers financial assets into a securitization vehicle must retain risk.  No transfer, no risk retention.

In its decision (joined by Judge Brett Kavanaugh), the Court was very clear in its analysis.  Essentially, the decision said “thank you very much, we can read simple English sentences, and the law is crystal clear on this point (if not on much else).”  The regulators may not elide the transfer requirement of the Dodd-Frank Act by calling managers of open market CLOs securitization sponsors, when they don’t transfer assets to a securitization vehicle.  The Court went on to point out that if this was a loophole, it needed to be fixed by Congress, not the regulators.  Blessedly, a satisfying, albeit rare, victory for a plain reading of our mother tongue.  The regulations actually mean what they say!

The broadly syndicated CLO business has taken this ruling to heart and has been beavering away on transaction structures that no longer provide for the retention of credit risk. One big issue in that space now is whether you can square the circle about avoiding risk retention in the US, while somehow meeting the EU risk retention criteria.  But that’s a bit of legerdemain for discussion another day.  What I want to talk about is the utility of the LSTA decision in spaces other than the broadly syndicated CLO space—particularly for commercial real estate single-asset, single-borrower (SASB) securitizations, a product representing almost half of all CRE securitization offerings this year.
Continue Reading The Boundaries of Risk Retention Now That the D.C. Circuit Has Spoken

I don’t think risk retention is applicable to a direct issuance securitization.  Many single asset, single borrower (SASB) transactions can be structured to avoid the need to retain risk under the Dodd-Frank Act and the attendant Risk Retention Rule.  There.  I’ve said it.  Read on.
Continue Reading The Astonishingly Shrinking Risk Retention Rule – SASB Transactions Unshackled

Or maybe not.  At the outset, let’s give credit where credit is due.  It was gratifying to read a governmental missive on the capital markets that made sense, showed an actual grasp of how markets function and an awareness of the issues confronting capital formation.  Best damn thing I ever read coming out of the swamp.

The Treasury Report on the capital markets published in early October is indeed pretty fantastic stuff.  The Report covers the Treasury’s recommendation on re-centering many of the rules around the capital markets over a wide range of regulatory issues important to securitization and capital formation.

Let’s focus on the provisions in this Report that are central to securitization.

These can be summarized as follows:

  • There should be one agency with the responsibility for the Risk Retention Rule and we should dispense with the committee-of-committee that’s been running the clown car for the past couple of years. The old saw that “a camel is a horse built by a committee” is certainly proven by the risk retention experience.
  • Regulatory bank capital requirements treat investment in non-agency securitized instruments punitively.
  • Regulatory liquidity standards unfairly discriminate against securitized products.
  • Sponsor risk retention as set out in the Risk Retention Rule represents an unnecessary cost imposed upon securitization.
  • Some of the new and improved (read: expanded) disclosure requirements under Dodd-Frank are unnecessarily burdensome.

In other words, our regulatory regime needs a certain amount of recalibration to achieve its goals of safety and soundness in the financial market place while not impeding capital formation. 
Continue Reading Treasury Report on the Capital Markets: A New Day

A standalone securitization of a portfolio of properties closed in June. To our knowledge, this was the first transaction in recent memory done in a direct issuance format.  In this case, direct issuance means that the sponsor organized the lender and the depositor as well as a borrower and crafted the loan between the lender and borrower, which was simultaneously closed and funded by the bond proceeds from the securitization at closing.  An additional unique feature in this transaction was that the sponsor met its obligations under the risk retention rules with a horizontal cash deposit equal to 5% of the fair value of the certificates.  More on this later.

In this annoying new world of risk retention, the direct issuance model embodied in this transaction can be a paradigm for transactions in the SASB space.
Continue Reading Direct Issuance is Here – A New Paradigm for Single Asset Single Borrower (SASB) Securitization

John Cleese, one of the great classic philosophers of the mid-twentieth century, made that inauspicious (from the perspective of the Shop Keeper) observation, “This parrot is dead!”  To which Michael Palin responded that it was merely resting.  (It’s better in drag and with the East Ender accent, but you get the idea.)

The Parrot skit [I wish I could link you to YouTube here, it is really very funny, but the damn lawyers here won’t let me.] came to mind recently as I attempted to negotiate yet another Third Party Purchaser (TPP) Agreement in risk retention land.  As everyone knows and is heartily sick of hearing, all securitization transactions now require the sponsor, or in commercial real estate deals, a third party purchaser, to hold risk retention securities in accordance with the breathtakingly vacuous Risk Retention Rule.  At Dechert, we did one of the pre-effective date pretend risk retention deals and, our TPP agreement was a weighty six pages long.  Since the Rule became real, TPP agreements have metastasized into much longer, more complex documents raising numerous dauntingly trying questions.

I have begun to wonder whether the risk retention TPP agreement is already near its death bed just some brief months following its birth.Continue Reading Monty Python Dead Parrot? Risk Retention and the Third Party Purchaser