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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?

Back in the febrile, hyperventilated times that birthed the Dodd-Frank Wall Street Reform and Consumer Protection Act (blessedly known simply as Dodd-Frank), one of the issues that energized the activists’ intent on “fixing” what was wrong was the notion that the ratings agencies were complicit in the overpricing of financial assets.  In a “want for a nail, a shoe was lost” sort of way, overpricing of financial assets caused asset bubbles which led to or exacerbated the apocalypse.  The culprit?  The issuer pay model by which the issuers which retained the ratings agencies to rate their securities paid the ratings agencies’ fees from the proceeds of the related securitization.  From a certain perspective, this was having the prisoners hire the guards.
Continue Reading Ratings Agencies in the Crosshairs

Just a few short months ago we took on the breathtakingly ill-conceived Current Expected Credit Loss (CECL) standard that the Financial Accounting Standards Board (FASB) proposed to implement starting in 2020.  CECL will require major shifts in the way lenders model, forecast and reserve for future losses.  It would materially drive up capital requirements, impair earnings and ultimately drive spreads higher to the borrowing community.  And by the way, it would be pro-cyclical.  If we were actually going to do these things (and we shouldn’t), an unelected financial standard setting committee is surely the wrong party to hold the pen.

The lending community screamed bloody murder, and for good reason.  Luckily, the small banking community was at the forefront on this cri de coeur.  While the money center banks may be one of our pols’ favorite whipping boys, everyone in politics loves the small banker (visions of Jimmy Stewart dancing in their reptilian brains) because those bankers made loans to their constituents, support their local community and, oh, by the way, made significant political contributions.Continue Reading Beany & CECL – Episode 2

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

Our friend, Dan Rubock, just inked an interesting and timely piece entitled, “Key pillars of loan structural quality are eroding, especially in single-borrower deals.”  As usual, Dan’s views at Moody’s are worth considerable attention.  That piece focused on bad-boy carve-out guaranties, the quality of borrower financial information, property release provisions, qualified transfer provisions and cash sweep triggers.  While reasonable professionals can differ on both the incidence and the impact of the deterioration of these deal features, the point is well taken that the deterioration of legal structural features in CRE lending is often a canary in the mine for… excessive exuberance.  I’ll put off litigating Dan’s points for a future time, but this got me thinking about all that we do in legally structuring loans for the capital market.

Much of the playbook for capital markets CRE lending was established at the dawn of this business.  At that time, Dechert was outside counsel to S&P and for good or ill, Dechert was responsible for much of the early architecture of CRE documentation and legal underwriting.  While these criteria have been periodically tweaked over the years and adapted to changes to the underlying CRE lending market, the original architecture is still pretty much in place.

I would posit that it is an industry failing that we haven’t really given legal underwriting a thorough rethink in 30 years.  Here’s a start.
Continue Reading I Urgently Want to Report the Deaths of the Non-Con Opinion (But Probably Cannot…Yet)

Closeup of a seismograph machine earthquake

Returning to our theme that nothing’s easy and everything keeps changing, here is one out of left field. Let’s talk Probable Maximum Loss (“PML”) and seismic risk. ASTM International, the market standard setting organization for everything from toilet bowls to condoms, has just issued an amended seismic standards: Standard Guide for Assessments of Buildings (E2026-16) and their Standard Practice for Probable Maximum Loss Evaluations for Earthquakes (E2557-16) (the “Standards”)[1]. These Standards establish an industry norm for the requirements to evaluate the financial risk for real estate in zones with seismic activity. Each investigation of real estate is “graded” between a Level 0 investigation (high uncertainty) and a Level 3 investigation (very low uncertainty) based on the qualifications of the assessors and the work done during the investigation. The Standards refer to a Level 0 investigation as a “desktop” investigation, maybe (in a completely subtle way) to imply something about the proximity of the assessors to the potentially shaking site.Continue Reading “Shaking” Things Up: Seismic Risk Assessments

Here’s one from left field that I only began to focus on recently.  In mid-December, the gnomes of Basel published several “Consultative Documents” on bank capital and credit risk issues.  First of all, I’m somewhat suspicious by the open palmed amiability of something called a “Consultative Document.”  That suggests a dialogue with regulators but this is Euro-speak for “Proposed Rule.”  My experience is that once something gets to the Proposed Rule stage, the relationship between the regulatory and the regulated is short on consultation and long on prescription.  But hey… maybe this is different. 
Continue Reading Regulators: It’s in Their Nature

The second annual IMN CLO and Leveraged Loan Conference returned to New York this past week. Building on last year’s momentum (discussed here), over 1,500 managers and investors, in addition to structurers, bankers, lawyers and other industry actors, filled the convention space at the Conrad Hotel, doubling last year’s attendance and causing standing room only conditions in the large downtown venue. Yes, many conference attendees were literally prevented by conference staff from entering the fully packed Conrad ballrooms.Continue Reading Second Annual IMN CLO and Leveraged Loan Conference Update

While we’re on the topic of Dodd-Frank rules and regs that could have a significant impact on the securitization market, the SEC recently reported the findings of a study it conducted regarding assigned credit ratings for structured finance products – a report required under Section 939F of the Dodd-Frank Act that will subsequently lead to new rulemaking. Continue Reading Dechert OnPoint Details Recent SEC Report on Credit Ratings for Structured Finance Products