Deutsche bank CMBS loan servicing transfer precedes market's biggest challenge
LONDON, Sept 21 (IFR) - Deutsche Bank marked its exit from European CMBS loan servicing by selling up to Situs Asset Management, in only the second wholesale acquisition of mortgage servicing following Capita's purchase of Barclays servicing unit last year.
The bank was one of the main players during the pre-crisis conduit CMBS boom with its DECO programme, providing various roles as lender, structurer, servicer and counterparty, and is the only bank to launch CMBS deals in the post-crisis era such as the Chiswick Park and Merry Hill trades.
And while being announced at the same time as the bank's major strategic review, it does not seem to be an integral part of it - the loans had already been securitised and so the risk was removed from its balance sheet. One source said that CMBS loan servicing was not a core business unit within the bank, but that it would remain active in the commercial real estate market nonetheless.
Situs takes on issuer servicing roles in nine DECO CMBS, some 83 loans with a current outstanding amount of EUR5.8bn.
The deal documents allow the issuer to enter into sub-servicing agreements with third parties, provided certain conditions are met.
In the case of these nine deals, Deutsche Bank will maintain involvement in the servicing of the loans, particularly the debt service payment collections and reporting.
The bank, therefore remains liable for any rights of the issuer that result from a failure of the sub-servicer, and it is also required to monitor performance and enforce the obligations of each sub-servicer.
Situs will take over all other loan functions, according to Moody's. It also assumes primary servicer responsibilities for another three DECO deals (series 5, 6 and 15), as well as Vanwall Finance with 12 loans totalling EUR1.6bn.
The overall package includes the only two post-crisis deals - Deco MHill 2012-1 and Deco CSPK - backed by loans on the Merry Hill shopping centre and Chiswick Park business units in the UK.
These announcements bring to a close the drawn-out takeover by Situs of Deutsche Bank's servicing unit - which sees key staff members joining Situs in the process.
The troubles of the commercial real estate market are actually having a double-edged impact on servicers. On the one hand it can stretch their capacity to service doubtful loans given the large amounts of them, which are subjected to various degrees of performance depending on the market sector. But for other specialists it presents an opportunity to boost their exposure by winning new mandates.
Transfers of responsibilities are not uncommon. For instance, Solutus has replaced Hatfield Philips in certain special servicing positions, but wholesale changes of servicer across a portfolio of deals rather than individual trades are more difficult, given the scale of the exercise.
Situs will attempt to counter such problems, and potential disruptions to note payments, by using Deutsche's systems for two payment dates before switching over to its own.
This should smooth the transition, which is also made easier by the fact that Situs already has European responsibilities.
However, market contacts suggest there may be some pushback, possibly from rating agencies strict requirements, for new firms stepping in.
One head of securitisation specialist alluded to this fact, noting the Moody's review of the deals and the award of sub-servicing contracts only for nine trades.
Even so, there is certainly scope for new entrants in the market, taking into consideration the supply of loans that needs servicing, but displacement could prove troublesome.
"There are plenty of people looking [to take on servicing roles] but are there people looking to offload is more the question," the source said.
MAIN CHALLENGES TO COME
There are other restrictions too. For instance, the documentation of the Utrecht Funding notes, which were used in the restructuring bid of Opera Finance (Uni-Invest) which TPG/Patron won, contains a clause that the loan cannot be serviced by a competitor of TPG or Patron.
And in the instances where special servicers are owned by private equity groups, the transfers could be laden with clauses restricting such competition.
Situs, nonetheless, now has access to a small chunk of the European CMBS market.
This sector remains constrained by a large proportion of poorly performing loans written in the boom years preceding the crisis. These are secured predominantly on secondary quality assets, and will put servicers' skills to the test.
Morgan Stanley analysts estimated at the beginning of September estimated around 144 loans worth EUR15bn (around 22% of the outstanding CMBS market) in special servicing, up from EUR12bn (16%) at the start of the year.
Some 44 loans, worth EUR4bn, were transferred to special from January to early September alone, the bank said, of which 89% by count and 85% by volume were driven by maturity defaults.
And despite all the headlines of how mired the CMBS market is, the real test is still to come. As much as EUR24bn of European CMBS loans are due to mature in 2013, according to S&P.
Cumulative maturity defaults could reach EUR12bn, exceeding the combined total for 2009 to 2012. This will be a major test of servicers' capacity, the agency warned in a report published earlier this month.
"If loan performance continues apace, special servicers will play an increasingly important role in European CMBS as they look for workable solutions for a rising total of nonperforming loans", S&P said. (Reporting by Anil Mayre)