It has become apparent that CMBS servicers and trustees need to clarify the issuer's ability to use the liquidity facility in examining swap counterparty failures, Barclays Capital said in a report released today.
The bank said that the ability to bridge a temporary shortfall, between the (unhedged) fixed-rate interest received on the loans and the floating rate interest on the bonds, is important in the short term for CMBS buyers to know whether interest will be paid on their bond class at the next interest payment date.
Analysts explained that it is not always clear from the offering circular whether liquidity is available to fund a shortfall resulting from either an issuer-level or borrower-level swap counterparty default, the bank said.
Investors will probably take comfort, according to Barclays, from confirmation that liquidity is available for that eventuality. Considering that this information has become clearly material to the pricing of the bonds, in our view, this should be made publicly available. Selective disclosure to existing investors might limit their ability to trade the bonds in the future.
Trustees need to determine the best course of action in the long term in regards to the swaps. This might include replacing any defaulted swaps with new swaps, which might not be a contractual obligation under the transaction documents. Even if trustees request a bondholder vote, it will depend on the voting procedures as to what the ultimate outcome will be, analysts said.
Analysts would expect triple-A investors to press for a speedy replacement of the swap, even if current market costs are unattractive. But lower-rated tranche buyers might have less of an incentive to accept a replacement swap as the costs of a new swap might cause a loss to their bonds.
Fitch Ratings put a number of CMBS bonds on rating watch negative today, which was helpful, according to analysts.
Based on the bank's own analysis, they envisage interest shortfalls to the class C in WINDM IX, classes E and F in WINDM X, classes D and E in WINDM XI and classes D and E in WINDM XIV at each of their respective next interest payments dates, unless liquidity covers these shortfalls.
In WINDM XII, we expect that the cash flow from the property to be insufficient to service interest on the unrated B-notes, leaving all rated CMBS without a shortfall. Unfortunately, the investor reports on WINDM VII and WINDM VIII are not publicly available, making it impossible to estimate the shortfall on bonds in these transactions.