CMBS 2.0 IN FOCUS: Liquidity Facilities – The Wild Child Of CMBS 2.0

In the second of a series of blogs, in which we address the evolution of CMBS structural features, we will consider the most (arguably) integral form of credit enhancement for any CMBS deal, the liquidity facility.

Liquidity facilities are structured as 364 day committed revolving credit lines that can be drawn by a CMBS issuer to satisfy the payment of any shortfall in expenses, the payment of any shortfall in interest on notes, as well as the payment of any amount owed to a third party that directly relates to the underlying commercial real estate (a so called property protection drawing). Anyone that is familiar with the 1.0 vintage of deals will testify that such transactions exhibited a huge degree of variance when it came to the structuring of the liquidity facility, which can largely be attributable to the myriad of different CMBS 1.0 structures as well as the need to accommodate individual liquidity facility provider requirements.

With the emergence of CMBS 2.0 many market participants had hoped that there would be greater standardisation of these facilities and a higher degree of uniformity adopted between individual deals. In that vein, market participants will no doubt welcome the vastly improved documentation which includes fixes for many of the mechanical shortcomings that were endemic in CMBS 1.0. However, when it comes to actually creating uniformity with respect to key structural features relating to liquidity facilities, the new deals continue to be plagued with a similar level of heterogeneity as was the case with the previous deals.

Indeed, a structural vagary that was rife in CMBS 1.0 was the fee structure associated with a standby drawing. Historically these fees were structured in such a way that following a standby drawing either: (i) the liquidity provider received the same commitment fee as well as any income derived from the investment of the standby loan in eligible securities; or (ii) the standby loan was treated as if it was a normal liquidity drawing and thus the provider received a full amount of interest (although typically that portion of interest that exceeded the commitment fee was subordinated to payment of interest on notes). The new deals in the market reveal that this vagary is still rife with a compendium of different interest payment structures currently being employed which not only constitute a variance of the two structures outlined above but also new structures which include in one instance a...