Bankruptcies Will Test New CMBS Structures

Standard & Poor's is concerned that the legal and structural provisions that some forms of CMBS securitization are built on have never been tested.

This means they don't know what could happen in a bankruptcy situation, according to Kim Diamond, an S&P managing director.

At a panel session on "the changing mezzanine, B-piece and B-note market," at the Commercial Mortgage Securities Association's annual CMBS investors conference, Ms. Diamond said that the rating agency is seeing "people more and more push the envelope on certain things" and that S&P wants to "stay on top of things."

"We are at a crossroads," she said, adding that "lots of structural enhancements put into place are more theoretical."

And "now they are being tested, with some working well and others not so well."

Michael S. Gambro, a partner with the law firm of Cadwalader, Wickersham & Taft, is also of the opinion that these agreements are "not necessarily enforceable in bankruptcy proceedings."

Mr. Gambro doesn't believe that the field is getting more complicated in terms of structuring of law documents.

As more and more people are looking at these loans, new structures have evolved and there is less standardization, Mr. Gambro said, but this has not created any problems.

Jonathan Strain, a Morgan Stanley managing director and the moderator of the session, is concerned about increasing concentration in the CMBS 'B' piece market.

Mr. Strain noted that in 36 conduit deals involving 'B' pieces, seven parties were the buyers involved.

Lee Cotton, CEO of ARCap REIT, a 'B' piece buyer, noted that the issue is not so much one of financial capital as of human capital.

"This is a tough business for people to get into, you don't see people coming and out of this," he said.

This does give the few active 'B' piece buyers power to shape the market, he conceded, noting that nursing homes are largely absent from CMBS pools these days because 'B' piece buyers do not like them.

In a lighter vein, Ms.Diamond noted that the rating agencies used to be the scapegoats, as a small group of players that exert influence and discipline on the market - a role that has now been taken over by the 'B' piece buyers.

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