Despite the cloud of FAS 140 lingering over the CMBS market, the dilemma is not expected to effectively stop new issuance, sources say.
The market is eagerly anticipating the results of last Monday's meeting between FASB and representatives of the commercial real estate markets. Though FASB has not given a specific time frame, market players are saying that the best-case scenario would be a resolution after two weeks while a worst-case scenario would mean getting a response just before the Q&A on FAS 140 is published in June.
"FAS 140 may delay the market, but eventually the current $16 billion-plus pipeline will be securitized either with or without sale treatment," said Darrell Wheeler, CMBS strategist at Salomon Smith Barney. "The CMBS market financed more than 40% of all commercial mortgages last year and has provided liquidity to the commercial real estate market that has enabled the sector to be one of the few areas to avoid the impact of the economic slowdown so far.
"I don't think that FASB intended to disrupt that capital-market liquidity, and at the same time issuers have demonstrated that they can be flexible. Thus I have confidence that FAS 140 will be clarified in a manner that will enable issuers to continue to fund the commercial mortgage market."
Even after a response has been written, it has to get FASB board approval.
"We're working on what we heard at that meeting" said Halsey Bullen, senior project manager at FASB. "We've already held some follow-on meetings and some discussions with several of the participants and are trying to formulate a response. At this point, the issue is sufficiently high profile that I want to make sure that my board members don't object before we go ahead."
An early solution
But even without resolution of the question, some market observers are predicting that there may be a satisfactory solution in advance of any statement from FASB which may lead to new issuance.
A deal that exemplifies this is the CSFB 2001 CF2, which, as of press time, was in the pre-marketing stage. The deal had written into its pooling and servicing agreement the specific workout options open to special servicers. However, Merrill Lynch's weekly CMBS report implied that accountants familiar with the FAS 140 appeal mentioned that they are skeptical that this is a solution to the "automatic response" requirement for loan sales.
The report, however, encourages market participants to work on possible solutions as well as the associations to pursue existing language as a possible solution.
"FASB is trying to assure that the issuer relinquishes control of or influence over the assets and in most CMBS that is the case," said Mary Stuart Freydberg from Merrill Lynch. "The issue of control that the FASB is trying to address is not present in most CMBS transactions. That's why we believe that's it's not going to be the end of new issuance. It's going to be a matter of clarification and minor adjustments to the documents. Then we could move forward."
The storm after the calm...
Still, a sizeable CMBS forward calendar is anticipated once the FAS 140 issue is settled, and there will be a glut of primary issuance shoved into the pipeline.
According to Salomon's Wheeler, FAS 140 has prevented institutional investors from investing in new issuance that was scheduled for April, leaving investors to scramble and buy product in the secondary markets. Still, investors should keep their eye on upcoming opportunity in the market.
"We saw most dealers' secondary inventories picked clean, resulting in ten-year triple-A spreads tightening 5 basis points," Wheeler said. "We expect this positive market tone will continue, but investors should also keep an eye on the potential large pipeline that will come once the FAS 140 issue is settled. The slowdown means that once the 140 rule is settled the new issues could have problems queueing for investor attention."
Aside from the CSFB deal, a $280 million single borrower deal by Potomac/Gurnee Mills 2001-XLPGM, is the market, while $1 billion deals by Bear Stearns/Wells Fargo/Principal Financial and J.P. Morgan Chase/GE/Bear are also expected in April.