The use of pool principal collections to recover advances is becoming more commonplace in CMBS transactions in an effort to reduce interest shortfalls.
"The concept is being more widely adopted throughout the industry," said Standard & Poor's Director Eric Thompson. "A majority of the deals that have closed since the fall of last year have incorporated this concept."
The new language being used in pooling and servicing agreements (PSAs) actually covers both nonrecoverable and recoverable advances. The recoverable advances are referred to by the Work-Out Delayed Reimbursement Amount (WODRA) concept. While most PSAs are written to include both concepts, this is not always the case. "There are some Lehman Brothers transactions that allowed the use of pool principal collections to get the nonrecoverable amounts, but didn't incorporate the WODRA concept," Thompson said.
If a WODRA is established, the servicer is entitled to seek reimbursement of advances on the modified loan from pooled principal collections of all loans. This holds true regardless of how long the recoveries are expected to take, a recent report from Merrill Lynch explained. Principal payments diverted to pay a WODRA are replaced later by principal payments made in respect of the WODRA.
Transactions containing Shilo Inn Loans, which entered bankruptcy in 2002, will be the first deals to actually put the WODRA concept into practice. "The language being put into current deals is in anticipation of a modification," said Merrill Lynch Director Mary Stuart Freydberg. "Shilo Inns will be the first time we see the reporting of WODRA amounts and the first time we will see the diversion of principal." WODRA payments have not yet begun on these deals. They will likely start with the upcoming distribution, Freydberg said.
The market did not expect to see WODRA payments being made so soon as the concept didn't show up in PSAs until late 2003. However, more of these payments could be made sooner than anticipated.
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