10/12/2012

CMBS Shops, Insurers Mull Sharing Big Loans

Commercial MBS shops are talking to insurance companies about the possibility of teaming up on the origination of large mortgages.

While no deals appear to have been struck yet, several insurance executives said there have been active discussions about the strategy in recent weeks.

“We have spoken with conduit folks, and I think this is a possibility, in terms of a cost-effective execution for borrowers and a viable approach to funding large loans,” said a senior executive with a major insurer.

The discussions are limited to large, relatively low-leverage loans on high-quality properties. One possibility: Queens Center mall in Queens, N.Y. A partnership between shopping-center REIT Macerich and Ontario Teachers is seeking a long-term, fixed-rate loan of up to $650 million, which would translate into a loan-to-value ratio of no more than 55%. At least one securitization shop bidding on the assignment has talked to an insurer about joining forces.

In a typical scenario, a mortgage would be divided into two or more pieces of equal seniority. An insurer would park one piece on its balance sheet. The rest of the loan would be securitized by one or more CMBS shops.

While insurers and securitization programs teamed up a few times before the financial crisis, the strategy hasn’t been employed in recent years. Since the crash, insurers have dominated the origination of large loans on trophy properties because of their pricing advantage. But that edge has been eroded by the major CMBS rally over the past several weeks, opening the door for team-ups.

Until recently, “CMBS spreads were so wide that if a deal was of quality, it would go to a life company, without exception,” said a lender at an insurer. “Now there’s more pricing parity.”

Team-ups could have advantages for both sides. An insurer could gain entree to an investment too big to take down on its own. Also, because loans provide higher yields than CMBS, an insurer might find it more attractive to earmark funds for a loan participation rather than for bond purchases.

For CMBS shops, the inclusion of insurers widens the field of potential loan partners, making it easier to commit to funding giant mortgages. It might also add cachet to a lending syndicate, because insurers have solid reputations with borrowers, especially in light of horror stories from property owners about the difficulty of dealing with special servicers on the workout of securitized mortgages after the crash.

Several issues would have to be resolved. A key one is how servicing would be overseen. Insurers generally retain the servicing rights to their originations and are reluctant to surrender control. For that reason, there’s general agreement among insurers that they would participate only in loans in which the potential for a workout is remote.

“I don’t know if I’d sign up for that [strategy] except if you said it was on super-core deals,” said an insurance-company executive.

Another issue: Would the loan be written to securitization or life-company standards? “My guess is that each lender would do their own underwriting, but the loan documents would be consistent with the more-conservative terms of either lender,” said a lender at another insurer. For example, he said, the loan might include the more-restrictive loan-transfer provisions common to portfolio loans and the more-conservative CMBS provisions requiring tenants to make rent payments directly to “lockboxes” under the control of servicers, rather than to property owners.

Overall, he added, the provisions are likely to be more restrictive than on portfolio loans. Team-ups “will be most attractive to borrowers who care less about the flexibility that a life-company-only club deal might be able to provide,” he said.

There have been a few examples of joint CMBS-insurer loans in the past. One was a $244.7 million loan originated in 2005 on the Station Place 1 office building at 100 F Street NW in Washington. The fixed-rate mortgage was divided into two A-notes and a B-note. UBS securitized a $40.4 million A-note and the $63 million B-note via a $2.4 billion pooled deal (LB-UBS Commercial Mortgage Trust, 2005-C7). New York Life took down the remaining $141.4 million A-note.

The transaction’s prospectus gives New York Life the power “to advise and direct” the master and special servicers in the case of foreclosure or a material modification of the loan terms. New York Life also has the right to terminate the special servicer without cause. The loan, which has performed well, is scheduled to mature in 2015.

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