CRE Finance Council Europe launches principles for new CMBS issuance
CRE Finance Council Europe, a trade association dedicated to promoting the strength and liquidity of commercial real estate finance, has launched a consultative document outlining principles for new CMBS issuance.
The Market Principles for Issuing European CMBS 2.0 aims to help bring confidence back to the European real estate capital markets and stimulate the further development of European CMBS in order to address the immediate need for senior debt in European commercial real estate transactions.
It has been estimated that new debt origination in the European commercial real estate markets has declined by 77 per cent over the last five years, with investor appetite for new CMBS held back by legacy issues and the macro-economic environment which has resulted in significant pricing volatility. The effective closure of the CMBS market has created a lack of senior debt liquidity, which has been exacerbated by the withdrawal of traditional sources of bank finance and limited appetite from alternative sources such as private equity. At present, there is no clear source of funding to refinance an estimated EUR75bn in outstanding European CMBS loans, most of which was originated at the peak of the securitisation boom between 2004 and 2007.
The new principles are intended to help address a number of these legacy issues, focusing on areas of particular importance which have previously generated the most controversy. Although there are multiple benefits to a successful CMBS loan, including providing operational flexibility and viable returns for the borrower, securing safety of investment for the bondholder, and providing a well-documented loan package for the servicer and balance sheet security for the bank, balancing these various facets is key.
The principles draw on the specific lessons learnt from previous European CMBS transactions. They represent the views of a cross-section of historical and active participants in the commercial real estate capital markets including issuing banks, investors, borrowers, lawyers, servicers and trustees. Relevant CMBS requirements of the Bank of England and the European Central Bank have also been taken into account.
The focus of the principles is on transaction structures, transaction counterparties and disclosure of appropriate levels of information. Key areas addressed include:
- Disclosure requirements for both pre and post issuance information as well as investor reporting, investor notices, valuations and cashflow models;
- CMBS structural features, such as controlling party rights and voting provisions;
- Revenue extraction e.g. excess spread monetisation (including Class X Note structuring); and
- Role of the servicer and other counterparties such as trustees and cash managers.
Jaymon Jones, director of strategic initiatives at CREFC Europe, says: “We welcome this consultative document which results from a collaboration of parties across the commercial real estate property sector in the UK and Europe. The launch comes at a time when the European new issuance market has effectively been closed for the last five years, held back by legacy issues and the lack of alternative funding as traditional investors have all but fallen away. It is imperative that we return confidence to the European real estate debt markets and address the pressing need for capital for future commercial real estate deals.”
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