Recent Fitch Ratings’ “unsolicited assessment” of the DECO 2011-CSPK CMBS deal is an example of the harsh penalties sponsors face for ‘rating shopping’, Royal Bank of Scotland (RBS) analysts said in a recent report.
Deutsche Bank is the issuer of the new U.K. CMBS deal. The structure is backed 100% by U.K. office properties and offers investors a ₤235 million ($385 million) Standard & Poor's 'AAA'-rated class A tranche and a ₤30 million class B 'AA'-rated tranche.
The deal is the first de-linked European CMBS to be issued since the start of the financial crisis. It is gaining attention from a wide range of market spectators and active participants.
Fitch, which is not rating the transaction, released an ‘unsolicited assessment’ of the deal, indicating that in its view the senior bond leverage exceeds what can be supported by a triple-A rating. According to RBS, Fitch's view is largely based on the leverage at the Class A level.
However, S&P stated in its presale report that that the structure includes a number of new features not previously seen on CMBS transactions such as interest rate exposure, where half the loan is in fixed-rate form, with the remainder hedged via a cap agreement rather than a swap.
Another new feature is the post loan maturity of the Class X Note. According to RBS, interest will continue to accrue but will be deferred and retained in a reserve fund, limiting the negative impact of the Class X notes should notes not be repaid at expected maturity. This, analysts said, also minimizes potential conflict between the servicer, the Class X holder and B loan buyer who may all be the same entity.
The structure also includes valuation tests to determine controlling creditor whenever a material loan modification is considered; and requirements/ability for the servicer to maximize proceeds with respect to the loan rather than considering broader interests of all noteholders.
"The deal hence incorporates many of the features that are being collectively described as ‘CMBS 2.0’," RBS analysts said. "Additional features could include is a simpler ownership structure. In the DECO deal, as highlighted by Fitch, the borrower is an entity based in a different legal jurisdiction (Jersey) from the assets (U.K.). As such it will be interesting to see how investors view the relative value of this at the suggested discount margin of 175 basis points versus legacy deals in excess of 300 basis points."
Analysts added that considering that the return on legacy CMBS is largely from the discounted price, investors retain potential pick-ups from earlier-than-expected redemption and extension risk.