Last week, an article written by Mr. Frank Partnoy, professor of law at the University of San Diego,  appeared in the Financial Times and was subsequently picked up by The Wall Street Journal.  Mr. Partnoy argues that the next global financial crisis will be found inside the CLO industry and that past is prologue.

I think he is looking under the wrong rock for the next global financial crisis and this note should serve as a letter to the editor in rebuttal, as it were.  (Perhaps I’ll send Professor Partnoy his own personalized copy.)

Here’s the news flash:  There will be another global financial crisis.  Death, taxes, the cycle and Page Six misbehavior will never go away.  However, history suggests that the next one will be less severe than the 2007-2009 meltdown which, one can hope will continue to be entitled to the honorific “The Great Recession” for many decades to come. 
Continue Reading The Sequel to the Global Financial Crisis Is Not the CLO! (Ok, Not Yet)

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

You know, sometimes life’s problems smack you against the side of the head like a 2×4, and sometimes it’s just a multiplicity of middling offenses that become so annoying that you might just want to roll over and die. Think anything involving a conversation with the DMV or the phone company. Today, we’re talking the death of a thousand paper cuts brought to us by those well-meaning folks who are beavering away to replace LIBOR.
Continue Reading The End of Days (Or At Least LIBOR)

What in the world have we done to ourselves? Our CRE Securitization business, or at least the conduit part of our business, continues to shrink:  $800 billion in outstanding principal balance in 2007 and now, $400 billion?  Maybe, right now, we’re at a run rate of $50 billion per year.  Is that enough?  Does that deliver critical mass?  Are we a going concern?

Maybe.

As the business shrinks, the CMBS share of the Lehman Index (Bloomberg Index) continues to dwindle.   That imperils liquidity and the diminishment of liquidity itself becomes yet another reason to abandon the sector.  As that happens, some investors drop out, some “right size” their CMBS teams and as fewer analysts follow the space, the business again dwindles.  Net/net, investors lose interest as there are fewer and fewer reasons to buy CMBS bonds.  As the business gets smaller, less attention is paid by the mortgage banking community, fewer opportunities find their way to the CMBS window and other service providers are stressed. Wash, rinse and repeat until someone shuts off the lights and locks the door on the way out.

Okay, I’m overstating it a bit, but you get the idea.  We’ve got a problem.Continue Reading It’s Time to Bring Back the Square State Conduit:  If We Build It, They Will Come.

The Trump administration and Congress have lots on the agenda: tax reform, financial regulation reform, job creation (think infrastructure spending, maybe?) and more. While it seems unlikely that much of anything “real” is going to happen anytime soon or even this year (other than more drama, more tweets and more Trump-isms), there’s some hope for a fix for the many failings of the High Volatility Commercial Real Estate (HVCRE) Rule.
Continue Reading HVCRE: Busting Myths

Washington, DC SkylineCREFC held its Annual Conference last week in Washington D.C. Given the current politically charged climate, 2017 felt like a very appropriate time to move the Annual Conference from its traditional home in New York to Washington. Although attendance was down slightly from last year, over 1000 people attended the conference. Dechert hosted a reception on Monday at The Source restaurant for 250 friends and colleagues, where the excellent food and free flowing drinks lasted well beyond the official closing time.

The conference featured a number of new panels this year, including panels on the state of retail and the New York City real estate market. As usual, Dechert was well-represented in the panels and meetings. Dechert’s Dave Forti participated in a panel on “The Art of the Deal: Large Loan Challenges in 2017”, which discussed the current state of the large loan market and the challenges facing single-asset single-borrower (SASB) securitizations. One highlight of conference was the industry leaders’ round-table, which included Dechert’s Rick Jones and Laura Swihart, who closed out the roundtable in typical satirical, Washington fashion (Covfefe anyone?)
Continue Reading 2017 CREFC Annual Conference: Into the Heart of the Swamp

Just when you thought it was safe to go out at night again, another reason not to deploy capital is slouching into Bethlehem. We’ve written a lot here at CrunchedCredit about the Damian-like progeny of Dodd-Frank and Basel, but we’ve let this one slip through the cracks. And, boy, oh boy! – We need to pay attention to this thing. We’re talking FASB.

Okay, so what’s this all about? The story starts in Norwalk, Connecticut back in the 1970’s. The accounting industry at that time, chartered a private institution known as the Financial Accounting Standards Board (FASB) to establish financial accounting and reporting standards for public and private companies complying with Generally Accepted Accounting Principles (GAAP). A powerful organization was born. FASB still sits today in leafy Norwalk, Connecticut and generally beavers away in relative obscurity, tinkering with GAAP standards, both large and small. Periodically, however, the Board tosses a Zeus-like bolt of lightning from on high masquerading in the clothing of dry, dusty guidance to auditors which fundamentally changes how business is conducted. (Btw, let me tell you, Norwalk makes a pretty crappy Olympus).Continue Reading Let’s Just Fess Up and Agree, Loans are Dodgy Things:  FASB’s New Growth Killing Rule on Loan Losses

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

Well, we’ve had the big reveal and the administration’s new tax plan is out.  This plan, announced with a great deal of fanfare, feels more like a campaign promise than an actual executable plan.  At two hundred forty-six words from end to end (four different typesets, three different fonts, three colors, weird spacing and a sad little dash at the top), anyone who was hoping for clarity and a plan to go to the bank on, is either disappointed… or perhaps relieved.
Continue Reading Have Yourself a Very Trumpy Tax Plan

The Auditing Standards Board (the “ASB”) of the American Institute of Certified Public Accountants recently released new standards as part of the “Attestation Clarity Project” with the goal of redrafting all its standards “in clarity format” (what format were they in before?  And, while we’re at it, can we try to use English here?  Clarity format?).  This Project will require compliance by bankers and issuers with very specific disclosure obligations (reps?) before the auditors will issue an Agreed Upon Procedures Letter (AUPs) for securitizations.  Some of this formalized existing practice, but the changes go further and are far more prescriptive.  A “new letter of representation” from the party who hires the auditors (the “Engaging Party”) is required as well as similar letters from the parties providing the data that the auditors are reviewing (each, a “Responsible Party”).  These new rules will become effective on May 1, 2017.  Any AUP that is issued after May 1 will be subject to the new rules.
Continue Reading New Accounting Rules Regarding AUPs Taking Effect May 1, 2017:  More Fun for a Battered Industry