If the wisdom of crowds has any validity (and there’s no real evidence that it’s any worse than the pontifical huffings of the chattering class), then there’s hope for 2023. Optimism did itself proud at CREFC. We’ll see if that optimism is recapitulated at SFVegas and at the MBA CREF meeting coming up in the
SASB: The (Shotgun?) Marriage of Mortgage and Mezz
By Rick Jones & Crunched Credit on
There’s a lot of reasons to structure a large loan destined for securitization as a mortgage in part and a mezzanine loan in part. Sometimes it’s simply that the borrower is needy while the capital markets are charry. In that case, the lender whacks up the credit into a mortgage loan for SASB execution and assumes (hopes) there’s someone out there with sufficient acumen, optimism or naivete to buy the mezzanine loan. But sometimes, there are other reasons to divide a loan into a mortgage and mezz.
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The Boundaries of Risk Retention Now That the D.C. Circuit Has Spoken
By Rick Jones on
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.
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Direct Issuance is Here – A New Paradigm for Single Asset Single Borrower (SASB) Securitization
By Rick Jones on
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.
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