Capital markets and real estate lawyers in Paul Hasting's London office are no strangers to commercial-mortgage-backed securities (CMBSs).
Paul Hastings made the headlines in 2012 for representing Deutsche Bank during an €887 million CMBS, which signalled a flicker of recovery in a market that that hadn't yet picked up the pace since the recession.
Broadly speaking, a CMBS is a kind of mortgage-backed security (MBS) that's secured using loans on commercial property. You may well be more familiar with mortgage-backed securities that are backed by residential real estate: a similar process is at play in both types of transaction.
Essentially, a borrower agrees to take on a certain amount of debt in order to purchase a mortgage for property (in this case property used for commercial purposes). In return, the lender (ie the bank) anticipates receiving money lent for the property back, plus interest, and usually over a fixed period of time.
Before MBSs were introduced in 1970, banks simply kept loans until all of the debt had been repaid, while making a profit on the interest. However, holding onto a loan for a long period ties up the bank's capital, as well as its resources. By selling the debt to investors, the bank can shift risk onto a third party and generate income by originating and servicing the mortgages. The result? Banks have more capital and resources available to dish out extra loans and pursue a broader array of opportunities.
This process of selling debt to investors is known as securitisation. Banks usually bundle together a whole pool of commercial mortgages to tempt investors with the expectation of a higher return. Consequently, this bundle of mortgages is sold as a single bond, often to an investment bank, which groups together the various loans according to quality and then sells these sub-sections on to a mix of investors. Rating agencies can give investors a picture of how much the bonds are worth at the time of the securitisation, and can also update ratings according to the pool's ongoing performance.
Such transactions are notoriously risky: success very much depends on whether borrowers are able to pay back their debt. A default on a mortgage in the era before MBSs would have been an unfortunate but relatively contained problem. Post-MBS, however, a default or collection of defaults can lead to long-lasting repercussions, given the degrees of investment stacked up and reliant on individual mortgage payments. A pronounced dip in the value of MBSs in the US – both commercial and residential – was a key cause of the financial crisis of 2008, and led directly to the collapse of Lehman Brothers (which had billions tied up in MBSs) and the near-collapse of insurer AIG. For a three-minute explanation of how this happened, check out this clip from the 2011 HBO movie Too Big to Fail.
As a result, MBSs have developed quite a bad rep. Following the boom years of the early noughties, when MBSs were very much the craze, the whole post-recession era saw the market come to a virtual standstill. The European market was particularly quiet: bankers saw a pool of around 100 investors in the boom years fall to just 20, and CMBS issuances were practically non-existent – only two took place between 2008 and September 2012.
Two new CMBS deals in late 2012 involving Deutsche Bank, RBS and Blackstone gave cause for a tentative streak of optimism, but on the whole investors remained wary, put off by devaluations of commercial real estate, downgrades on existing MBSs issued before the crash, and subsequent losses hitting hedge funds and asset managers.
Commentators at the time predicted that recovery in the market will clump around simpler transactions involving high-quality properties and far fewer loans. German multifamily property is a particularly attractive option in light of this, and Paul Hastings was quick on the uptake: lawyers represented Capita Asset Services as servicer and special servicer in relation to the securitisation of a €1.9 billion loan secured on German multifamily properties.
Flash forward to 2015, and the German multifamily system is still a powerful force in the European CMBS market, although other European markets are catching up. Paul Hasting's Frankfurt office has been particularly busy, advising market leader Deutsche Bank on the structuring of a CMBS loan to German real estate company IVG Immobilien valued at €679.99 million. The Frankfurters also advised Hatfield Philips International on the sale of the Margaux portfolio from the Titan Europe CMBS for €268 million.
The firm's London office was active in the CMBS market in early 2015 advising Bank of America Merrill Launch on the €286.425 million Taurus 2015-1 IT securitisation, which is sponsored by three commercial real estate loans, courtesy of Blackstone, Cerberus and Orion, and is secured by a portfolio of 14 commercial properties in Italy.
Late 2014 marked the first time that European CMBS deals involved more debt backed by multiple real estate borrowers than single properties since the crash. Paul Hastings lawyers believe that this shift in the markets could signal a possible CMBS comeback in Europe. While Germany is still very much at the heart of the market, Paul Hasting's lawyers have predicted further growth in CMBSs in Italy and the UK, and a rise in CMBS deals in the Benelux, France and Spain.