Get documents about "Recourse Here Today, Gone Tomorrow
Document Sample
Issue 138, October 13, 2006
Jack Toliver
Managing Director Recourse: Here Today, Gone Tomorrow
(312) 332-0889
jtoliver@dbrs.com Corporate and personal recourse is prevalent in Canada, but it is seldom seen in U.S. and European CMBS
markets. Although statistics that quantify the benefit of having recourse, whether it is to defer mortgage default
Mary Jane Potthoff
or to reduce a potential loss, are difficult to find, it is considered a net positive credit characteristic of those
Senior Vice President – CMBS
(312) 332-0837 loans.
mjpotthoff@dbrs.com
DBRS expects loans that have enforceable recourse to a financially capable guarantor to have a lower
Erin Stafford probability of default. Since a corporate investment-grade rating generally applies to unsecured debt, DBRS
Senior Vice President – CMBS would apply its credit strength to the secured debt that is backed by a full-recourse obligation. Although loans
Surveillance with recourse to non-investment-grade rated guarantors do not benefit from flooring, the appropriate
(312) 332-3291
estafford@dbrs.com probability of default adjustments are considered on a case-by-case basis. It is important to note that the
unsecured recourse obligation of the guarantor is provided in addition to the exclusive senior secured right to
the property.
Toronto
200 King Street West Partial recourse takes on many meanings and falls somewhere between full recourse and no recourse at all.
Suite 1304 DBRS has divided the universe of partial recourse loans into three types: (1) Partial recourse can be
Toronto, ON M5H 3T4 constrained by a percentage or dollar amount, generally ranging from as little as 10% to as high as 75%. It is
Canada assumed the guarantee will cover any potential loss amount up to that stated amount or percent of the loan.
(416) 593-5577 (2) Event recourse occurs when an event signals the end of the recourse. (3) Lease-up recourse is used when
New York a property has yet to reach a stabilized occupancy.
One Exchange Plaza Before the beginning of 2003,
55 Broadway, Suite 1502 100.0%
investors in Canadian CMBS
New York, NY 10006
Percent of Canadian CMBS Population
90.0% didn’t need to think about
U.S.A.
(212) 806-3277 80.0% partial recourse loans because
70.0%
they accounted for only 7% of
Chicago the average CMBS pool. But
101 North Wacker Drive 60.0% Non-Recourse since then, as can be seen
Suite 100
Chicago, IL 60606
50.0% Partial Recourse from the adjacent chart, the
U.S.A. 40.0% Full Recourse partial recourse portion of
(312) 332-3429 30.0%
pools has more than doubled.
London 20.0% An event recourse loan can be
Hasilwood House deceiving. Take, for example,
10.0%
60 Bishopsgate 60 Colonnade Road, a
London EC2N 4AW 0.0%
property in Ottawa. The deal’s
United Kingdom 1998 1999 2000 2001 2002 2003 2004 2005 YTD
+44 (0) 20 7562 5602 Q3 Annex A indicates that the
2006 loan has 100% recourse to the
Frankfurt guarantors, which may
Year
Trianon Tower
become limited to 25% each
Mainzer Landstrasse 16
60325 Frankfurt until May 15, 2010, and
Germany subsequently may be fully released. This means that the loan could be full recourse for an indeterminate
+49 (0) 69 971 68 144 amount of time (likely shorter than the loan term). Complicating matters, the loan recourse release terms are
not made available to investors unless the loan is one of the top five assets of the CMBS transaction.
Paris
27 avenue de l’Opéra
Generally, DBRS gives minimal to no probability of default credit for event recourse.
75001 Paris
France Similar to event recourse, although likely to be released in a substantially shorter period of time, is lease-up
+33 (0) 1 70 38 52 14 recourse, where the property has not reached a stabilized occupancy and recourse will be released once a
particular occupancy is attained, with no regard for future vacancy increases. In instances of lease-up
recourse, DBRS will not lower the asset’s probability of default.
Recourse is not always the easiest to assess nor are the various forms easily identified; therefore, DBRS has
developed several evaluation methodologies that can accurately determine the impact of these loans on the
pool and the pool’s credit worthiness. For instance, when a guarantor is named, we take a conservative
approach to that person’s net worth, knowing that it could change or that that individual could take on other
loans during the life of the one we are evaluating. If the recourse terms of the loan or the guarantor’s net worth
aren’t available, we use our contacts at lending organizations to learn them.
These actions add significant time to our ratings process, but because the usage of partial recourse loans is
on the rise, we believe that it is time well spent. Throughout the term of the loan, recourse guarantors are
Andrea Flynn often required to continue to submit evidence of net worth as part of the loan covenants. Whether partial or full
Publisher recourse, this allows DBRS to continually assess the credit worthiness of the recourse. Since there aren’t
(312) 332-3429 always minimum net worth or liquidity requirements for the recourse guarantor, what was once a strong
aflynn@dbrs.com recourse guarantor may now be a highly levered individual or ailing company.
Please refer to www.dbrs.com for DBRS’s Privacy Policy, Disclaimers, Proprietary Rights, Terms and Conditions of Use.
Related docs
