MSC 2016-BNK2, which pools loans from Morgan Stanley, Wells Fargo and Bank of America Merrill Lynch, is the second conduit to test the waters with a compliant structure. The issuers will retain a vertical interest in each outstanding class equal to 5% of the entire deal. The first deal to comply with the rule, brought by the same trio of banks, was issued in August and also employed a vertical structure.
According to a CMBS debt broker, it is not that issuers are averse to a horizontal model, which would entail selling the most junior 5% portion to a B-piece investor. Rather, issuers and investors in the subordinate 5% have been unable to see eye to eye on key issues.
“The issuers have been getting pushback from the B-piece buyers,” the broker said. While the broker did not name specific banks that have run into trouble with the horizontal model, he noted that all of the major issuers are running into similar problems.
A sticking point for issuers has been the fact that they are still on the hook for compliance even after selling the bonds to the B-piece investor. If the buyer does something that violates the rule, such as sell or hedge the bonds, the issuer will be open to enforcement action.
This problem is compounded by the fact that the six regulatory agencies that wrote the rule have not stated what the penalties would be in the event that compliance is breached. This, according to a B-piece buyer speaking with GlobalCapital, is a particular friction point between the issuers and investors.
“The deal sponsor wants the B-piece buyer to agree to an unlimited blank cheque for what the buyer is responsible for in the event compliance is breached. B-piece buyers have said ‘no way, no how’,” the B-piece buyer said.
Another issue is that none of the B-piece investors, who typically bid on the subordinate bonds before the rest of the deal is offered, are keen to be the first in the market to set the price for a horizontal slice of a deal.
“No one wants to have to be the first one to figure out how this pricing is derived and then have to say, ‘OK, the risk retention piece is worth this much’,” the B-piece buyer said. He added that the pricing for the junior bonds, which is almost never disclosed with the rest of the deal, will have to be made public under risk retention.
“There is potential first mover advantage, but if you are the first to show your hand it could be harmful.”
Unofficial price guidance for the Morgan Stanley deal was out on Wednesday afternoon, according to an investor, with the $194.8m senior ‘A-4’ class being given guidance of 111bp over swaps and the $37m BBB- ‘D’ class receiving guidance of 525bp-550bp over swaps.
The deal is expected to be priced by Friday.