Monday, November 19, 2007

Loan diversity in the CMBS market

I'm no expert on the CMBS market, nor do I want to be. While they are extremely useful to my clients, as a lawyer they are not the most exciting part of my day.

But there was an interesting little trinket buried in the latest report that the CMBS market is going to take a while to come back. Now that we are going back to smaller loan pools, there is less diversity in the pools than in the megadeals we'd been seeing.

What does this mean? Well, the bigger deals in the pool will have to be scrutinized more than ever because a default on that deal could be a huge problem. A $100 million deal defaulting means, as the story says, a lot more to a $2 billion pool than to a $4 billion one. It reminds me of 2001: underwriters are being cautious, rating agencies are worrying, B-piece buyers are kicking deals out of pools.

I don't know yet what this means on the legal side. For instance, the bane of my existence when doing these deals is writing what is called a "substantive non-consolidation opinion." VERY generally speaking, this complicated letter is an opinion that a single-purpose borrowing entity acquiring property will not, in the event of a bankruptcy, have its assets consolidated with the assets of a majority owner, and vice versa. These opinions are usually only required for "big deals" and they are very expensive to prepare. So what is a "big deal" these days? At one time it was $15 million, then $25 million, then $40 million then perhaps even higher. I don't know what the big deal threshold is today, and I'll bet it varies from pool to pool and depends on the rating agency involved. But having to prepare these opinions -- and the "pairings" requested by the lender in such opinions -- can make a big difference for a borrower.

I also found quotes on trends by Anthony Downs of The Brookings Institutution buried in the story to be instructive: "“People who have all this money don’t want to sit on it. Gradually, the pressure will be greater and greater to make a deal.” Banks and insurance companies that hold loans on their books are in a position to start lending immediately, he said." So make like Nike and just do it.