CMBS: We can’t work it out
Case study: Plantation Place
A performing real estate loan is under the auspices of the master or primary servicer; it is only when that loan is deemed to be in default that it will be transferred to the special servicer. And the existence of loan-to-value (LTV) covenants in many European loans’ documentation could mean that dozens of them are heading that way. "For any new issuance in 2006 and 2007 LTV covenants will probably be in breach," observes Andy Wilcox at Capmark. Indeed, with commercial property values in the UK having fallen by 40%, many deals inked prior to that will probably be in breach of their LTV covenants as well.
There is substantial disagreement over whether servicers should act on LTV breaches in an environment of such unprecedented value collapse. "Securitization is a cashflow technique, not a valuation technique, so many people argue that CMBS loans should not have LTV covenants at all," says one lawyer. There is some justification for this point of view, but it does not address the nature of the loans themselves. CMBS loans are usually balloon or bullet structures and the LTV covenant is used to mitigate the stored-up risk of non-payment at maturity.
