Effective December 24, 2016, CMBS issuers — or B-piece buyers in their stead — will be required to retain 5% of transactions for at least five years. CMBS issuers can retain a “vertical strip” encompassing 5% of every tranche, a “horizontal” 5% strip at the bottom of the capital stack, or an “L-shape” strip that combines the first two options. The rules are part of the Dodd-Frank reforms passed by Congress after the financial markets collapsed in 2007-2008. For more on risk-retention, click here.
CMBS issuers are starting to test investors with bond structures that they believe are in compliance with the risk-retention rules. They want to verify compliance with the rules and determine the relative profit that can be achieved under various structures to see which might be most efficient.
Under the “vertical strip” plan, Wells Fargo, Bank of America and Morgan Stanley are reportedly working on a CMBS issue in which Wells Fargo has agreed to hold 5% of the face amount of each class. If the transaction is successful, the three banks have agreed to rotate the risk-retention responsibility on future deals. The ongoing feasibility of the vertical may hinge on the amount of capital the banks will be required to hold against losses.
Under the “horizontal strip” plan, b-piece buyers that currently buy the most junior portion of CMBS issues, but not 5%, are beginning to team up with investors to jointly buy the 5% horizontal strip and then presumably divvy it up internally according to their respective risk profiles. Prime Finance has set up a new b-piece platform and teamed up with LNR to comply with risk-retention. The duo purchased their first b-piece from a deal issued by Wells Fargo and Citigroup. Och-Ziff Capital, another new investor, is also teaming up with LNR to buy risk-retention complaint bonds from an upcoming deal from JPMorgan and Deutsche Bank.