CMBS 2.0: Has the time come for an industry-form A/B Colender?


Early last decade, two Dechert partners, Tim Stafford and Dave Forti, published Mezzanine Debt: Suggested Standard Form of Intercreditor Agreement in CMBS World. The article proposed a standard form of mortgage-mezzanine intercreditor that provided a portion of the bedrock upon which the architecture of CRE mezzanine lending would be built for the years to follow. At the time of its publication, burgeoning demand for mezzanine debt (and mezz lenders' desire to create liquidity in their positions) had created a tension among mezz lenders, bond investors and rating agencies - the absence of a form ICA resulted in mezz debt being an inconsistent and pricey financing alternative. The CMSA (now CREFC) form ICA made mezz lending more predictable, less expensive and easier to trade.

Having closed on the acquisition of several A/B structures in past months, I’m wondering if, as our recovery continues, it could be time for a form A/B Colender? The basic architecture of the A/B Colender is already largely understood and could be effectively reduced to a widely-accepted formula. The waterfall, absent any deal-specific fee sharing arrangement, is pretty standard (pre-triggering event, Servicer fees, A interest, B interest and pro-rata fees; post-triggering event, Servicer, A interest, A principal, A costs and then to the B). Cure rights and purchase options could be standardized without necessarily limiting a B Note holder’s ability to negotiate changes from deal-to-deal. (That said, I’ve never quite understood how a B Note holder cures a non-monetary event of default, and in the past few years I think the A would be more than happy to accept a par pay-out on a defaulted loan regardless of whether the requirements of the Colender had been fulfilled). Limitations on transfers of interests in the B Note (more than 49% only to a Qualified Transferee) and the rights of the B Note holder to pledge or finance its interest are, again, largely standard across deals.

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