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    How new structures can                                                                     have regard in all circumstances for both
                                                                                               the securitization and the interests of the B
                                                                                               lender.

    spur growth in CMBS                                                                           To protect its investment by preventing
                                                                                               any unnecessary crystallization of loss,
                                                                                               the B lender will usually have the right to
                                                                                               cure a loan event of default by making
                                                                                               any necessary advances or monetary
                                                                                               payments and usually (for so long as the
    Charles Roberts and Conor Downey of Cadwalader Wickersham & Taft                           whole mortgage loan is a specially
    look at developments in UK and European CMBS deals                                         serviced mortgage loan, but before
                                                                                               foreclosure on the security) the B lender


    T
              he commercial mortgage-backed      therefore, would end up receiving a lower will also be entitled to purchase the
              securitization (CMBS) market       interest rate than the B loan. If the         mortgage loan from the mortgage loan
              continued to show significant      originator is trying to create an             lender.
    growth and innovation in 2004, with          investment grade CMBS offering with a            A further variation on this type of
    European CMBS and multi-family bond          loan that has a high loan-to-value ratio,     structure was seen in the February 2005
    issuance totalling about €22 billion ($28    an A/B loan structure allows the              Taurus CMBS transaction, which was
    billion). This was almost double the figure  originator to turn part of the high loan-     secured on properties located in the UK.
    compared to 2003, although the number of to-value loan into an investment grade            In this transaction, three of the loans that
    transactions in Europe had increased only    loan. At the same time, the originator        were securitized represented the senior
    slightly over the same period. This rapid    will create a separate B loan that            tranche of larger mortgage loans. This is
    growth in the value of UK and continental    represents the subordinate portion of this the first instance in Europe of a pooled
    European CMBS offerings is expected to       loan. The B loan is placed with investors     loan CMBS with multiple A/B
    continue over the next few years, bringing   outside of the capital markets at a higher    structures. Prior to this, A/B structures
    with it significant structural innovation to yield than the A loan.                        had largely been confined to large single
    the market.                                     Naturally, the B lender will insist on     loan transactions.
       One example of this innovation has        certain protective rights in respect of its      The Taurus transaction was also of
    been the evolution of A/B loan               subordinate position. It is typical in A/B    significance as it was the first UK CMBS
    structures. Seen for the first time in       structures to restrict the B lender from      transaction to have joint originators,
    Europe in 2003 in the DECO CIT               having any direct                                                      namely GMAC
    securitization, an A/B loan structure        rights regarding the                                                   Commercial
    featured in several European CMBS            timing or manner          The ability to use an A/B                    Mortgage Bank
    transactions last year, such as ABN          of enforcement of                                                      Europe and
    AMRO’s Quick Star securitization.            the security.             structure with a CMBS loan                   Merrill Lynch
       A/B structures have frequently            Instead, the B            provides originators with greater Capital
    appeared in US CMBS transactions. In         lender will be given                                                   Corporation. The
    essence, the deal is structured so that the  the ability to have       flexibility to tailor loans to               GMAC- and
    whole mortgage loan is split between a       consultation rights       match the exposure and risk                  Merrill-originated
    senior participation – the A loan – and a    with respect to                                                        loans were pooled
    junior participation -the B loan – with      enforcement and           levels sought in the various                 to form the
    the A loan securitized and the B loan        certain material                                                       securitizable
    purchased by specialist investors.           modifications
                                                                           markets for real estate                      portfolio.
    Fundamental to this structure is that the    affecting the whole       investments                                  Cooperative
    subordinate tranche ranks pari passu with mortgage loan. In                                                         arrangements of
    the senior tranche (or at least receives     addition, the B                                                        this kind can
    interest and principal payments) before      lender will have the                                                   allow investment
    certain events of default, but following     right to remove and replace the special       banks to amass securitizable loan
    certain events of default the B loan is      servicer in the CMBS transaction.             portfolios more quickly than they would
    subordinated to all payments on the A        Combined, the right to remove the special be able to do independently, reducing the
    loan.                                        servicer together with this consultation      time between loan origination and
       The ability to use an A/B structure       right puts the B lender in a strong position securitization and therefore minimizing
    with a CMBS loan provides originators        with respect to the whole mortgage loan       the balance sheet impact of the loans to
    with greater flexibility to tailor loans to  and the protection of its interest therein.   the banks. As a result of these efficiencies,
    match the exposure and risk levels sought However, the rights of the B lender are          we expect to see more partnered CMBS
    in the various markets for real estate       cancelled if its value (based on the value of transactions in 2005.
    investments. The whole loan is actually      the underlying properties as against all
    split into separate tranches, and the        indebtedness senior to such B loan) is less   Pan-European CMBS
    interest rate is redistributed between the   than 25% of its outstanding amount. In        The laws of European countries such as
    A and the B loans. Typically, the A loan     order to mitigate this risk to the B lender,  France, Italy and Belgium have
    is the portion that would constitute the     the servicing standard requires the servicer traditionally made CMBS transactions
    investment grade portion of the loan and, and special servicer of the whole loan to        problematic where they include loans



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Author biographies
                                                                                                     servicer to act in accordance with
                            Charles Roberts                                                          instructions from the step two
                            Cadwalader Wickersham & Taft                                             servicer/special servicer. The French
                                                                                                     servicer is instructed by a French
                            Charles Roberts is partner in the capital markets department in the      management company who in turn
                            firm’s London office. Charles has represented managers, arrangers        appointed the step two servicer/special
                            and institutional investors in numerous public and private offerings.    servicer to act as consultant in
                            His practice is concentrated on mortgage securitization. Charles is      formulating servicing instructions.
                            a governor on the Commercial Mortgage Securities Association’s           However, as a further complication, due
                            (CMSA) European Chapter, and is also the international chair on the      to limitations imposed by French law, the
                            executive board of the CMSA.                                             French management company is not
    Charles has diverse experience in the area of structured mortgage finance in both the US         obliged to follow the advice of the step
and Europe, having participated in numerous transactions involving the issuance of securities        two servicer and may terminate its
in both debt and equity form. In particular, he has represented several major banks, including       appointment at any time. The Belgian
Credit Suisse First Boston, Deutsche Bank, GMAC, Morgan Stanley and Lehman Brothers in               bonds were serviced directly by the step
their securitization of large commercial mortgage loans. In addition, he has represented lenders     two servicer. These arrangements render
in the origination of mezzanine loans, preferred equity investments, subordinated debt and           the servicing somewhat more
participations.                                                                                      complicated than is desirable to typical
    Charles received a Bachelor of Science in Finance from New York University in 1987. He           investors in CMBS transactions –
earned his JD in 1993 from Hofstra University School of Law. He is admitted to practice law in       particularly, investors in the subordinate
England and New York.                                                                                bonds issued in such transactions.
                                                                                                        In December 2004, Credit Suisse First
                            Conor Downey                                                             Boston International (CSFBI) originated
                            Cadwalader Wickersham & Taft                                             and arranged the €268 million issuance
                            Conor Downey is special counsel in Cadwalader’s London office            by its conduit Titan Europe 2004-2,
                            and a member of the firm’s capital markets department. Conor has         which addressed some of these issues.
                            extensive experience documenting and implementing a broad                Firstly, unlike the Khronos transaction, a
                            range of securitization and structured finance products both in the      separate local true-sale securitization was
                            UK and throughout Europe. Prior to joining Cadwalader, Conor was         not carried out for each separate
                            a member of the London securitization group of Allen & Overy for         jurisdiction and the German loans
                            six years, where he structured numerous such transactions and            actually went into the securitization
                            advised on related banking and security issues. He has also been a       directly, thereby reducing costs. The
member of the securitization departments at Orrick Herrington & Sutcliffe and DLA, both in           proceeds of the issuance were used to
London. He has particular experience in the areas of commercial mortgage-backed and whole            purchase three German commercial
business securitization and was the lead lawyer on the award-winning Madame Tussauds and             mortgage loans as well as units in a
Trafford Shopping Centre transactions.                                                               French fonds commun de creances, which
    Conor is a frequent speaker on securitization topics at conferences. He holds a Bachelor of      in turn acquired two French loans. In
Civil Law Degree, with honours, from the University College Dublin. He is admitted to the rolls of   order to minimize the servicing
Solicitors of both England and Wales and Ireland.                                                    complexities, all the primary servicing
                                                                                                     arrangements were documented in a
originating in these jurisdictions. The             Ireland. In step one, true-sale                  single agreement.
majority of pan-European deals to date              securitizations were completed in France            This was only the second pan-
have therefore been synthetic transactions          and Ireland as if they were stand-alone          European CMBS securitization to have
or have involved a single borrower.                 transactions. In step two, a Luxembourg          taken place and structurally, it was the
Typically, due to tax or property                   issuer issued notes and used the proceeds        first pan-European deal to incorporate a
ownership laws in these jurisdictions, a            to purchase the step one notes issued by         traditional true-sale structure (in respect
separate local note or bond issuance must           the French issuer and the Irish issuer and       of the German loans). The progress made
be completed and the issued notes/bonds             additionally acquired Belgian bonds              in simplifying pan-European
acquired by the lead issuer. In doing so            issued by a Belgian issuer.                      securitizations is likely to promote more
these transactions end up resembling a                 This type of structure raises two areas       deals and a willingness among banks to
collateralized debt obligation transaction          of potential concern. Firstly, the local         move away from securitizations of a
rather than CMBS.                                   issuance adds to the cost of and time            particular portfolio of properties in a
   Even Morgan Stanley’s Khronos                    taken to complete the deal. Secondly,            given jurisdiction within a single
transaction, which was the first pan-               such a structure can complicate the              transaction. The result, as with partnered
European CMBS transaction involving                 servicing arrangements if each of the            originations, is that by transcending
loans to unaffiliated borrowers, involved           relevant loan portfolios has separate            jurisdictional borders and gaining access
an unconventional two-step securitization           servicing agreements.                            to a broader base of potential loans,
structure to achieve a form of true-sale.              The Khronos transaction includes three        investment banks are able to amass
The Khronos transaction involved a                  separate servicing arrangements. The Irish       securitizable loan portfolios in a shorter
securitization of seven loans secured by            issuer entered into a servicing agreement        time period thereby promoting increased
properties located in France, Belgium and           with the Irish servicer requiring the Irish      volumes of transactions.



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                                                                                                                   United Kingdom



    Structural mezzanine debt                  rights to compensate and protect its             In the Titan 2 transaction, the rating
    Titan 2 also incorporated an alternative   subordinate position. The mezzanine           agencies allowed enforcement on the
    type of subordinate debt to the A/B        lender will want to ensure that the terms     mezzanine collateral before enforcement
    structure in the form of structural        of the mortgage loan are not altered so       on the mortgage loans in certain
    mezzanine debt. In addition to the Titan   that the excess cash flow available to        circumstances. Pursuant to the inter-
    2 Loans, two additional structural         service the mezzanine loan is affected.       creditor agreements, each mezzanine
    mezzanine loans were entered into          Equally, however, the mortgage loan           lender is restricted from foreclosing on
    between two                                                        lender will want to   the mezzanine collateral unless it has
    mezzanine                                                          deal with the loan    either received written confirmation from
    borrowers              The progress made in                        without being         each of the rating agencies that the
    (affiliates of the                                                 unduly constrained    ratings of the notes will not be affected as
    Titan 2 Loan           simplifying pan-European                    by limitations        a result of such foreclosure, or unless it
    borrowers) and         securitizations is likely to                imposed by the        has satisfied certain conditions
    CSFBI and Credit                                                   mezzanine lender.     concerning the identity of the transferee
    Suisse First Boston promote more deals and a                          Similar to an      of the mezzanine collateral.
    as mezzanine           willingness among banks to                  A/B structure, the       Since the general proposition is that
    lenders.                                                           mezzanine lender      the lower the loan-to-value ratio on the
       Structural          move away from securitizations will require the                   securitized pool, the better the
    mezzanine debt         of a particular portfolio of                right to cure         subordination levels and pricing achieved
    transactions                                                       defaults on the       in the rating process, the use of
    include two            properties in a given jurisdiction mortgage loan and              mezzanine financing and A/B structures
    distinct loans: a                                                  thereby prevent a     will, it is expected, become increasingly
                           within a single transaction                                       prevalent in UK and European CMBS
    mortgage loan,                                                     mortgage
    which enters the                                                   foreclosure that      transactions. These structures, coupled
    securitized loan pool, and a structural    could otherwise extinguish the value of       with opportunities for originators to
    mezzanine loan. Each loan is secured by    the mezzanine collateral. Conversely, the     amass securitizable portfolios more
    distinct security packages. Unlike an A/B mortgage lender will want to ensure that       quickly, bodes well for the continued
    structure where the same collateral        if an event of default is continuing, where   growth of the CMBS market in the UK
    secures both loans, a structural mezzanine the mezzanine lender has not exercised its    and Europe in 2005.
    loan is secured over the mezzanine         cure rights, the mortgage lender can take
    borrower’s equity interest in the mortgage such action as is necessary to protect its
    loan borrower. This is known as the        collateral.                                   Cadwalader Wickersham & Taft
    mezzanine collateral. The mortgage loan       In the event of enforcement of the         265 Strand
    borrower distributes the cash flow from    mezzanine collateral, the mezzanine           London, WC2R 1BH
    the mortgage property that exceeds the     lender could become the mortgage loan         UK
    amounts due on the mortgage loan to the borrower. Accordingly, the rating agencies
    mezzanine borrower who applies it to       and the mortgage loan lender are keen to      Tel: +44 (0) 20 7170 8700
    service the structural mezzanine loan.     retain control regarding the identity and     Fax: +44 (0) 20 7170 8600
       Similar to an A/B structure, the        financial capacity of the mezzanine lender    Email: charles.roberts@cwt-uk.com;
    mezzanine lender will require certain      and any transfer of the mezzanine loan.       conor.downey@cwt-uk.com




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