ValueXpress has started origination of 5-year fixed-rate CMBS conduit loans with a partner. The loans will be held on the partner’s balance sheet until volatility in the CMBS market subsides. The 5-year fixed-rate program features interest rates in the 5.5% area and is available for all typical CMBS conduit loan assets. Loan documents will feature standard CMBS conduit loan terms, except that some loans will require recourse if it is determined that the transaction requires additional credit support, such as for large cash-out transactions. The loans will not require b-piece bond buyer approval, and therefore certainty of closing is much higher than what is available now in the CMBS market for loans that receive significant b-buyer scrutiny, such as hotels.
“Due to the enormous control b-piece bond buyers have to shape the composition of CMBS issues through kick-outs of loans they do not like, origination of CMBS loans for securitization has become a ‘best efforts’ exercise for less-desirable loans for the near term,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If the b-piece buyer blesses the loan, then the lender will close it; otherwise, the lender refuses to close the loan, creating considerable uncertainty and potential wasted time and money for borrowers.”
This process is quite different than what occurred last year. At that time, when a loan was kicked out by a b-buyer, the lender closed it anyway and simply contributed the loan into the next CMBS pool. Now lenders are unwilling to take the risk that the loan would be repeatedly kicked out.
The 5-year term can be selected by the borrower as the desired term when the Term Sheet is executed. Alternatively, the borrower can proceed with a 10-year term option, and if the b-piece buyer accepts the loan, it can be closed and contributed to the CMBS pool as a 10-year deal. If the b-piece buyer rejects the loan, it can be closed as a 5-year deal as a backstop and held on balance sheet. While this may not be ideal, the program provides a reasonable alternative to no loan at all.
“Thankfully the vast majority of our loans pass the b-buyer smell test,” noted Sneden. “Therefore, this program will really serve as a backstop. But there is never anything wrong with having a back-up plan, particularly in volatile markets.”