Although they play a crucial role in increasing recovery rates for CMBS investors during times of acute economic stress, Standard & Poor’s warned that the entrance of new and lesser known special servicing operations can overcrowd the market and complicate the servicing process.
Special servicing operations are the entities that reinstate cash flow from distressed assets in structured finance offerings. However, that key function can be stalled by complications when controlling class investors replace the acting servicer with one that they chose.
When examining Rating Agency Confirmations (RAC) from the past few years, S&P noticed that more and more are related to the transfer of servicing rights.
An RAC is a written indication that a specific change will not cause S&P to lower, qualify, or withdraw a current rating on any class of certificates issued in connection with a trust.
Specifically, these types of RACs now comprise over 30% of all RACs, which is much higher compared with the 10-year average of slightly lower than 12%, S&P said.
With the rising number of distressed commercial mortgage assets, new entrants and obscure special servicing operations create the risk of further complicating the system.
Analysts stated that the frequency of servicing transfers will probably continue rising, which they believe is a result of the increased number of delinquencies due to the unstable economy. They analyzed CMBS trends in light of increasing distressed asset volumes and an upcoming surge of asset maturities set to peak in 2016-2017 and concluded that dwindling collateral property values and rising realized losses are specific factors that can lead to further servicing transfers.
S&P said that all servicers in CMBS transactions should follow industry standards and try to execute transfers with as little disruption as possible. The rating agency urged servicers to provide the needed transition assistance to ensure that the disturbances and delays that the investors and borrowers experience are minimized.