Five years into the crisis, and you would have thought that CMBS bankers would have learnt a lesson or two about how to find ways of encouraging investors back to the table. After all, that is what's needed to get a market back on its feet.
But apparently not.
Last week’s Isobel Finance No 1 CMBS, arranged by RBS, was shunned by several investors because of its appalling transparency. Shockingly, the name of the borrower of the largest loan — the Alpha mezzanine loan, valued at £152m — was not disclosed.
In fact, one major investor who passed on the deal reckons that disclosure standards on many borrowers were insufficient.
The ABS industry has tried to set disclosure standards through best practice guidelines, stipulated by the Commercial Real Estate Financial Council under its CMBS 2.0 standard. But these are a fat lot of good if they are ignored.
RBS is no stranger to sub-standard CMBS disclosure, of course. Back in July, Fitch decided to withdraw ratings from three classes of RBS’s Epic (Drummond) CMBS and downgraded four more senior tranches because of a lack of information on work-out strategies.
But to be fair to the bank, RBS was never compelled to adopt these standards — the onus is on investors to put the pressure on firms to step up to the mark. If blame is to be laid anywhere, it should be at the doorstep of those who bought Isobel Finance No 1 and who lamely accepted what was shown to them without demanding better public disclosure.
Investors are in the strongest position to drive the process because they can vote with their feet. But unless they close ranks and insist on higher standards, it will be all too easy for issuers to take advantage.
The fact that investors did not take more of a stand is all the more surprising given that they have a fiduciary duty to undertake appropriate due diligence. After all, fund managers are investing on behalf of their clients — who will have paid a hefty fee in the belief that these professionals knew what questions to ask in order to justify their investment decision.
And if asset managers need any more firepower to justify their case, they need look no further than the newly proposed the Alternative Investment fund managers (AIFM) directive, which should come into effect next year. Under these proposals funds will be legally obliged to undertake proper due diligence — and that means having a thorough understanding of underlying CMBS borrowers.
Furthermore, under the Undertakings for Collective Investment in Transferable Securities (Ucits) rules, funds also have an obligation to undertake due diligence — which necessitates a minimum level of transparency.
And if all that were not enough, Article 122a of the Capital Requirements Directive makes it clear that there are disclosure standards that bank investors must adhere to. Buyers must be able to demonstrate that they have “a comprehensive and thorough understanding of their positions commensurate with the risk profile of their investments”. According to PwC, a failure to do so will result in additional risk weights of up to 1250% being applied to investments.
Legislation is only good in so far as it is sufficiently detailed and sufficiently enforced. But since in many of these cases is almost impossible to enforce, it is investors that must drive corporate governance.
They are the ultimate guardians of good practice. When they don’t insist on it, the result is bad product.