Euro CMBS principles revealed

A trade association issued fresh commercial mortgage-backed securities (CMBS) issuance guidelines today in anticipation of a healthier European real estate debt market.

CRE Finance Council Europe launched its Market Principles for Issuing European CMBS 2.0 paper in London this morning aiming to promote real estate finance generally by eliminating needless complexity in CMBS deals and by making new issuances more transparent and fairer for all parties involved.

Though not a magic bullet given that Europe’s macroeconomic problems present the biggest obstacle to a rejuvenated real estate finance market, the new principles should help sustain real estate financing once confidence does return, said members of a specially-convened committee examining best practice for CMBS issuance. The principles follow several months of dialogue with 67 association members including private equity firms as well as commercial banks, insurance companies, bondholders, investors, services and rating agencies. 

“The Market Principles for Issuing European CMBS 2.0 (paper) aims to help bring confidence back to the European real estate capital markets and stimulate further development of European CMBS in order to address the immediate need for senior debt in European commercial real estate transactions,” said the association in a press briefing this morning.

CRE Finance Council Europe said: “The principles are intended to help address a number of legacy issues, focussing on areas of particular importance which have previously generated the most controversy. Although there are multiple benefits to a successful CMBS loan, including providing operational flexibility and viable returns for the borrower, securing safety of investment for the bondholder, and providing a well-documented loan package for the servicer and balance sheet security for the bank – balancing these various facets is key.”

Revealing details of the document – out for consultation for eight weeks until mid-September – were members of the CMBS 2.0 committee led by chairman Nassar Hussain, a former banker at Merrill Lynch who now runs real estate investment banking firm Brookland Partners. Also present were Mark Nichol, senior director of Bank of America Merrill Lynch; Jim O’Leary, director of primary servicing at Capita Asset Services; Clive Bull, a manager in the European commercial real estate group at Deutsche Bank; Rob Marshall, head of ABS and property credit research at M&G Investment Management; and Charles Roberts, a partner at law firm Paul Hastings, which hosted the briefing.    

The members explained that it had not been possible to be completely prescriptive on all issues once views had been taken into account from issuers, borrowers, bondholders and servicers. Nevertheless, it set out “best practice principles” in areas such as disclosure for all parties and profit making by the banks that arrange the debt. The principles also address improving the identification of bondholders, appointing servicers and special servicers, as well as certain other structural features of a CMBS transaction.

The new principles could become established if the CMBS market returns to health in Europe, the committee members suggested, adding the first CMBS transaction completed in accordance with the new 2.0 guidelines might come as early as next year.

The European CMBS market is currently in a parlous state. Its effective closure has created a lack of senior debt liquidity, exacerbated by the withdrawal of traditional sources of bank finance and what the CRE Finance Council Europe called a “limited appetite” from alternative sources such as private equity in spite of increasing instance of private equity groups launching debt funds. The association said at present there was no clear source of funding to refinance an estimated €75 billion of outstanding European CMBS loans, most of which was originated at the peak of the securitisation boom between 2004 and 2007.