Debussy DTC, a £263m securitization that closed last week and was backed by a Toys R Us portfolio of 31 UK warehouses and stores, is the first CMBS deal that adheres to a list of principles that investors publicly outlined in a letter to CMBS arrangers in April.
Arranger Cairn Capital worked closely from the outset with the two eventual major noteholders – Pimco and Marathon Asset Management – to structure the deal. No investment bank was involved.
To become comfortable with the portfolio, Pimco and Marathon insisted on a change in servicing approach, in line with the April investor letter. This included making it much more difficult for “out of the money” noteholders to block any note-level changes. Many older deals did not make this distinction between “in the money” and “out of the money”, allowing investors with no prospect of recovery to hinder the workout process.
This will not be possible in Debussy CMBS. Only “in the money” classes of bondholders will be able to block any extraordinary resolutions. The servicer is also obliged to outline a refinancing plan at least six months before the loan maturity date, while the special servicer needs to outline a plan for recoveries at least 12 months before. These clauses are to avoid the deal workouts dragging through to bond maturity and encourage the servicer to be more decisive.
Investment banks have started taking CMBS seriously as a business again, and rightly so. Bank of America Merrill Lynch’s Taurus CMBS, which was priced earlier this year, generated more than $50m and alerted bank chiefs to the potential for vast profits. A hiring spree for CMBS structurers and arrangers is underway.
But the army of returning CMBS specialists will need to pay greater attention to an assertive investor base. This assertiveness has been an inevitable effect of being involved in so many restructurings and workouts since the crisis, which has increased the level of understanding on the buyside. The transition to being more involved in structuring deals was a natural evolution of knowing where the earlier crop of deals went wrong.
From now on, investors can point to Debussy and say there is a precedent for following the principles in their April letter. There are enough non-bank financing opportunities for investors to turn their backs on deals that do not meet their requirements and gain exposure to commercial real estate through other means.
Even in a market that has been grossly undersupplied for the past few years, the balance of power in the CMBS world is with the buyside.