Subordinate Financing in CMBS Transactions: Rating Agency, Investor and Servicing Concerns

Description

When considering how subordinate debt might affect a loan at securitization, the concerns of rating agencies, certificate purchasers (including B-piece investors) and other parties to the securitization transaction must be taken into account. They will assume that because a borrower has less equity in the property, the existence of subordinate debt increases the likelihood of default and the severity of loss after a default. Such loans will, therefore, have a higher default rating and adversely affect the pricing of the securities.

A/B, mezzanine and preferred equity components can impact a loan in different ways. Securitization parties will analyze loan and intercreditor documents to determine the subordinate lender’s ability to (a) transfer debt; (b) control the mortgaged property, the mortgage borrower, loan servicing and enforcement, and property management; and (c) receive payments and enforce its rights under the mortgage, among other issues. Counsel should be familiar with CMBS expectations and conventions concerning documenting each type of subordinate financing.

Senior/subordinate or pari passu structures present unique problems for loan servicers. In each case, there will be tension between the debt holders as to how much control each will have over the borrower’s decisions and the underlying collateral. Counsel must pay close attention to intercreditor provisions that address the rights and obligations of each lending party.

Listen as our authoritative panel discusses the treatment of A/B, pari passu, mezzanine and preferred equity in CMBS transactions, including the concerns of rating agencies, investors and servicers. The panel will also the discuss the CMBS intercreditor form and other standards which should be followed to achieve the best execution at securitization.