Although European lenders are moving toward harmonizing CMBS reporting standards, a further breakdown of the variations dictated by different jurisdictions is still needed before the market reaches U.S. reporting clarity, investors said at the recent Geneva ABS Summit.
According to the latest Fitch Ratings report on European CMBS surveillance, reporting standards for comparable transactions in the U.S. are much higher. Fitch added that the limited transparency across the European market has stifled its evolution, as many investors require more information before they commit to purchase.
"We recognize that we sell the risk and investors need to know what they are buying - we are following the U.S. lead on that end," said one issuer. "Historically, Europe has experienced more problems with data security laws, but as issuers, across the board, we have the duty to educate borrowers and this, at the moment, has not yet happened."
The Financial Services Authority (FSA) has raised one potential problem with not having a set standard of reporting - the potential for the dissemination of different levels of information. "Our advice is that issuers disclose the same level of data to everyone, and I think the market itself is forcing issuers to enforce a certain level of standards already," said one analyst.
While information standards in Europe are improving, Fitch adds, the ideal would be to see an increase of information distributed on a monthly basis for each deal the agency rates.
"I think that investors are demanding that, and if it's any longer [than one month], then there's potential for bigger problems when you come back to deal," said one investor.
In the past, when there has been little information available on deals, investors usually engage in the legwork and individually call in details. This, however, accentuates concerns of an unequal playing field, as the FSA has suggested. Some banks are still unable, or even unwilling, to give out this information because of particular disclosure laws, said one industry source.
"If you can't get the reporting on the same level, then maybe issuers can look to standardize the terminology they use in structures," said one market source. "Borrowers don't want standardization to be done under English law. It will have to be done at the jurisdictional level. But you can at least start by standardizing terminology."
The source suggests, for example, defining what would constitute a delinquency in a transaction: "The ESF is already working towards defining a set of bare minimum requirements. Now the question remains if anyone out there is really using them?"
Most of the issues have involved the non-investment grade tranches of CMBS. Market players understand the need for due diligence for these pieces, a banker said. It would be desirable to have permission from issuers to disclose the information that investors need.
"There were some enormous problems to transfer the legacy loans from the Opera deals," said one issuer. "Initially, we got investors to sign a confidentiality agreement, but in the end I think that turns out to be too much of a hassle - investors want to be able to get in and out of a deal with relative ease."
One of the drivers of change in the European CMBS market has been the arrival of the U.S. investor, who is used to getting more information before even considering a deal. "As the investor base becomes more global, you'll have more investors, especially on the U.S. side, who are already accustomed to this level of distribution, demanding a similar level of disclosure from European issuers," the banker said.
"In Europe, there has been a reluctance to do CMBS structures because the lending market has been healthier here and borrowers regularly go to banks for funding," said one market source. "There is still a huge reluctance to move away from the bank-lending format. But more and more banks want to keep all options open. They need to start thinking of documentation that would facilitate the securitization option later on and that requires having discipline in collecting the data and disclosing that data, so that it's ready to go when you are looking to launch."
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