Fitch Cites Complexity of 'Participated' Loans

Fitch Ratings has expressed concern that "participated" commercial mortgage-backed securities loans, in which a single first-mortgage loan is split into more than one note and held by different parties, are becoming more and more complex.The rating agency says agreements that require multiple parties in servicing and workout decisions will frustrate borrowers, delay necessary action to preserve the collateral, increase trust expenses, and result in additional and unnecessary losses. "Fitch is concerned that recent participated loan structures are inefficient and the lack of uniform intercreditor provisions and servicing procedures are causing confusion in the market," said Daniel Chambers, a senior director at Fitch. In addition, the rating agency is concerned that "history will repeat itself, and the lessons we learned with syndicated loans from the early '90s will be forgotten." It also worried that the "excessive coordination required among servicers and multiple subordinate investors will slow servicer responsiveness, and delays will inevitably lead to greater loan losses." Fitch is seeing more participations in the post-9/11 environment, with issuers more inclined to split large loans so as to mitigate "event risk and diversity concerns."