The first Commercial Mortgage Backed Securities (CMBS) deal with risk-retention structured to comply with Dodd-Frank regulations was issued in August, to widespread interest from the capital markets. The $870.6 million transaction was sponsored by Wells Fargo, Bank of America and Morgan Stanley who each retained a pro-rata share of a vertical strip of the transaction. The risk-retention requirement calls for CMBS loan originators to retain at least 5 percent of the credit risk using one of the following structures:
- A vertical interest where the sponsor retains 5 percent of the face value of each class of securities issued in the CMBS transaction;
- A horizontal interest where the sponsor retains 5 percent of the most subordinate class of the fair value of all of the CMBS issued; and
- An L-shaped combination where the retained interest consists of at least 5 percent of the value of the transaction held through a combination of the two structures mentioned above.
The CMBS market has held its collective breath to see if the new risk retention rules set to formally begin on December 24 of this year would put a further damper on what has been a challenging year for CMBS. A sigh of relief was felt as demand for this issuance was high and pricing was the tightest for new issuance in over one year.
NMHC/NAA will continue to follow this landmark transaction, which provides a benchmark for other issuers to lay the groundwork to get CMBS back on track after the market has experienced a significant decline in issuance volume so far this year.
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