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CMA
February 01, 2019  

EU Rule Prompts Deutsche to Go 'Vertical'

Deutsche Bank has decided to temporarily adjust its structuring strategy in the wake of a revision to the European Union’s risk-retention rules for securitizations.

Until a dispute about the revision is settled, Deutsche will retain direct exposure to its transactions, rather than continue to pass off all or part of that responsibility to B-piece buyers. That means Deutsche’s deals will use the vertical strips for risk retention, rather than horizontal or L-shape options.

The revision also applies to three other European banks that contribute loans to U.S. securitizations. Barclays has received guidance from British regulators that it can ignore the disputed provision and continue to pass off risk to third parties. Natixis and Societe Generale, meanwhile, are on standby, awaiting clarity from French regulators.

The revision, which took effect Jan. 1, includes a provision that effectively prohibits a B-piece buyer from fulfilling the risk-retention requirement on a U.S. commercial MBS deal if an E.U. lender contributes collateral.

The E.U. has said the provision was included inadvertently and has advised the regulators in its countries that it will be withdrawn. But that could take up to six months. In the meantime, the provision is officially on the books. That prompted the affected banks to seek guidance from home-country regulators on whether they could ignore the provision or must wait until it is formally withdrawn.

Deutsche evidently will wait. Industry pros said the bank has let it be known that it won’t participate in deals that pass off risk to third parties, meaning it will have to use the vertical-strip option. That’s a switch. During the first two years under risk retention, that option was used on only one of the 23 conduit deals to which Deutsche contributed loans, with the only exception coming early on.

The change is evident in the latest deal via the “Benchmark” brand, operated by Deutsche, Citigroup and J.P. Morgan. That $883.5 million transaction (BMARK 2019-B9), which the trio began marketing this week, uses a vertical strip, consisting of 5% of each class. Each dealer will retain bonds in proportion to its collateral contribution, or 28.9% in the case of Deutsche.

By turning to vertical strips, Deutsche is bucking the trend. Conduit issuers have increasingly been employing the other two options, which create B-pieces that buyers effectively must hold for the 10-year deal life. By contrast, when a vertical strip is used, the B-piece can be traded at any time.

Deutsche and Barclays have each contributed loans to two single-borrower deals so far this year, and both transactions employed vertical strips. Those transactions are a $1.2 billion offering (CAMB 2019-LIFE) backed by a mortgage to Brookfield Asset Management on the leasehold interests in eight life-science properties in Cambridge, Mass. (see Initial Pricings on Page 12); and a $515 million transaction (NYT 2019-NYT) backed by a mortgage to Brookfield on the leasehold interests in office and retail condominiums at the New York Times Building in Manhattan.

Societe Generale was in the market this week with a single-borrower transaction that also has a vertical strip. That $187.5 million offering (SGCMS 2019-787E) is backed by debt on the mixed-use building at 787 11th Avenue in Manhattan.