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The US economy is about to pay the butcher’s bill for a massive disruption of worldwide financial markets resulting from the elimination of the London Interbank Offered Rate, or LIBOR.  And, we are doing this on purpose.  It seems the denizens of the heights of our international financial fabric felt they had to do this in light of the discovery that a handful of bankers had unlawfully colluded to cause LIBOR to be mispriced for their personal advantage.  As Captain Renault said, “I’m shocked, shocked!”  This was so bad that we had to blow up the LIBOR index upon which trillions of dollars of financial assets are based?  While bankers behaving badly is a problem, why are we punishing markets because our banking regulatory cadres failed to prevent bad behavior?  At best, this is a monument to irrational rectitude.
Continue Reading Killing LIBOR: A Victory for Irrational Rectitude

We have been writing off and on about the restoration to good graces of the commercial real estate CLO since the early days of this current recovery, and it’s important to keep the conversation going.  Hey, if Pete Rose can get into the Hall of Fame (and as MLB is embracing gambling, that cannot but happen, right?), the full restoration of the reputation of the CRE CLO cannot be far behind.

First, let’s just stop and get some definitional clarity here for those of you who actually have a life.  Fundamentally, the CRE CLO is a device that provides match-term leverage for a portfolio lender, though the technology can be used for other purposes.  Loans are pooled, investment-grade securities are sold to investors, and the loans are repaid from debt service payments.  Customarily, the sponsor retains all of the equity and junior debt, creating structural leverage to enhance returns on the dollars invested in the structure.

It’s really a warehouse funded by the capital markets. As such, it provides for an excellent alignment of interests between investors and the sponsor, who holds the bottom of the capital stack.  The sponsor is in it for the long haul, managing financial assets for its benefit and the benefit of the investors alike.
Continue Reading The CRE CLO Is Back…and That’s Good

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

In 2013, the Obama administration issued the Cole Memorandum, which called a truce between federal prosecutors and marijuana businesses operating legitimately under state law.  After regime change in Washington, however, it may come as no surprise that Jeff Sessions—the Attorney General who once opined that “good people don’t smoke marijuana”—rescinded the Obama-era guidance.  The only real surprise is that it took him a whole year to do it.

Since at least 2013, marijuana-related businesses have generally been operating on predictable, albeit legally shaky, ground.  Dispensaries have expanded dramatically.  Though details vary wildly, nine states currently allow recreational use and medicinal use is currently permitted under the laws of all but four states.

As a result, commercial real estate lenders have to grapple with the increasingly common problem of the dispensary tenant, and a number of lenders are dipping their toes into lending in expectation of securitizing loans secured in part by dispensaries.  But given the January 2018 announcement that the Cole memo is no longer in effect, the question everyone’s asking is: are things really that different?  The answer, we think, is no—but with an asterisk.
Continue Reading Securitizing Marijuana Dispensary Properties in the Sessions Era

We published the below commentary, In Defense of Securitization, last week and we are republishing it today as, let’s face it, we’re all getting very French, and many of us took most of last week off.  Enjoy, if that’s the right word.

Returning to the theme of my most recent commentary entitled God Hates Securitization, I want to elaborate on the point I made there (yes, if you stuck with me all the way through to the end, there was a point):  We need to fight the narrative that banking, finance and securitization are evil.  I am afraid that if we don’t do something here soon, we’ll wake up one morning (probably after the next cyclical downturn is underway) and find pitchfork-wielding villagers outside the gates thinking they have found Dr. Frankenstein’s monster.  Populist anger, whipped up by our critics demonizing the financial sector, unfettered from the necessity to defend these positions in the marketplace of ideas and the court of public opinion, is powerful.  That, coupled with our recent embrace of the weaponization of policy disputes enforced by both civil and criminal legal proceeding, should frighten all of us who make our living in the financial sector.  And, to be clear, it should frighten everyone who understands the importance of an efficient and liquid capital market for the continued success of the US economy.
Continue Reading Repost: In Defense of Securitization – Unto the Breach or Close the Wall Up with Our Dead (with Apologies to Mr. Shakespeare)

Returning to the theme of my most recent commentary entitled God Hates Securitization, I want to elaborate on the point I made there (yes, if you stuck with me all the way through to the end, there was a point):  We need to fight the narrative that banking, finance and securitization are evil.  I am afraid that if we don’t do something here soon, we’ll wake up one morning (probably after the next cyclical downturn is underway) and find pitchfork-wielding villagers outside the gates thinking they have found Dr. Frankenstein’s monster.  Populist anger, whipped up by our critics demonizing the financial sector, unfettered from the necessity to defend these positions in the marketplace of ideas and the court of public opinion, is powerful.  That, coupled with our recent embrace of the weaponization of policy disputes enforced by both civil and criminal legal proceeding, should frighten all of us who make our living in the financial sector.  And, to be clear, it should frighten everyone who understands the importance of an efficient and liquid capital market for the continued success of the US economy.
Continue Reading In Defense of Securitization – Unto the Breach or Close the Wall Up with Our Dead (with Apologies to Mr. Shakespeare)

Morningstar has published a proposed method for rating single-asset/single-borrower (SASB) transactions. The new approach is slated to replace the “U.S. CMBS Subordination Model” with respect to SASBs and other forms of CMBS securities with similar credit and diversity profiles, including large-loan transactions and rake certificates. Morningstar has issued a request for comments on the proposal. We plan to provide our thoughts, described below, before the April 20th deadline, and encourage you to do the same. But first, answers to what are sure to be your most burning questions:
Continue Reading Morningstar Requests Comments on Proposed Rating Methodology for SASB Deals

Fresh off the Philadelphia Eagles’ first Super Bowl victory, a group of Dechert attorneys and 3,500 of our industry colleagues descended on San Diego for the Mortgage Bankers Association (MBA) CREF/Multifamily Housing Convention & Expo.  While those of us on the cross-country flight from Philadelphia were in a particularly jubilant mood, it was clear from the conference that the commercial real estate finance industry was also ready to keep the party going.
Continue Reading 2018 MBA Conference – Soaring into 2018

South Beach played host to the 2018 CREFC January Conference last week, as roughly 1,800 of our best friends in the CRE lending and securitization industry assembled in Miami to reflect on another year gone by and to muse about what’s in store (or out of store, in the case of retail) for 2018. In keeping with tradition, Dechert’s reception at the SLS Hotel was a hotbed of schmoozing, deal talk and employment fair, as over 400 guests took a break from discussing the SEC to… watch the SEC. The excitement of the Alabama-Georgia national championship game was a welcomed excuse to extend the party well beyond the official ending time (a move that is quickly becoming an expected budget buster for this annual event).

As usual, Dechert was well represented at the conference. Dechert’s Laura Swihart served as conference co-chair, and Rick Jones moderated a riveting (ok, not so riveting) panel on “Floating Rate Loans: Circa 2018”.

Conference panelists and attendees were generally bullish, and why wouldn’t they be after a 2017 that saw $95.3 billion in U.S. CMBS issuance (not including the GSEs). For color, that number is up more than 25% from 2016. Not a bad way to usher in the risk retention era.
Continue Reading 2018 CREFC January Conference – Plateau or Status Quo?

The Wall Street Journal reminded us this month that it was ten years ago, August 9, 2007, that the first regulatory domino in The Great Recession fell as BNP Paribas froze a series of resi investment funds for lack of a functioning market to value the securities. One could quibble about whether The Great Recession could be so precisely dated. Were there the blackened equivalent of green shoots earlier in the year? Did The Great Recession really only begin when the trouble in the subprime resi market morphed into all other credit markets? But that’s merely a cavil. August 9, 2007 is, for me, the date the world changed.
Continue Reading A Tale of Two Years; This Time Will Be Different