Barclays, UBS line up CMBS deal with fresh take on rules

By Joy Wiltermuth

NEW YORK, Jan 13 (IFR) - Barclays (LSE: BARC.L - news) and UBS (LSE: 0QNR.L - news) are teaming up with an alternative lender to satisfy risk retention rules for their first commercial property loan securitization of the year, according to a banker familiar with the matter.

A division of Miami-based Rialto Capital Management will keep a 5% vertical slice of the deal to comply with the reforms, the banker said.

But in a twist Rialto will also be contributing loans to the pool and buying the trade's B-piece - the risky bundle of mostly speculative-grade notes that sit first in line to absorb any losses.

"It's our first deal of the year and we looked at a lot of different structures," the banker told IFR.

"What you're going to see, especially in the first half, is different combinations that we haven't seen."

Bank of America Merrill Lynch, Wells Fargo (Swiss: WFC-USD.SW - news) and Morgan Stanley (Shenzhen: 002588.SZ - news) already united on two test-case trades in which the American banks voluntarily kept a 5% vertical cut of each deal prior to the rules going live in December.

Risk retention is a cornerstone of the sweeping Dodd Frank Act (Stuttgart: 0LW.SG - news) that was enacted by lawmakers in the wake of the financial crisis to curb risk-taking by Wall Street banks.

Now (Frankfurt: 11N.F - news) bankers that sell CMBS must find ways to comply with the rules or run the risk of having regulators shut down their ability to issue future bond deals.

THE 'L' STRUCTURE

Regulators, however, did give banks a number of options in order to comply with risk retention.

The most popular version so far has been the vertical option taken up by Bank of America Merrill Lynch, Wells and Morgan Stanley through their so-called "BANK" series.

While those deals were deemed highly successful in terms of setting a new template for banks' compliance, other structures are in the works.

Regulators also allowed B-piece buyers that keep 5% of the bottom of a deal - for at least five years - ways to satisfy the rules, in large part by agreeing not to trade or directly hedge their positions.

Disagreements around which party ultimately would be legally on the hook if a B-piece falls outside of compliance has been an industry sticking point.

And bankers have told IFR that such disputes were a chief reason why no multi-loan CMBS deals have been sold with B-piece retention yet.

One frequent B-piece buyer, however, told attendees at this week's top real estate conference in Miami to expect a shift away from the vertical option.

"I'd be shocked in a year from now if anyone was employing the vertical strip option," he said.

The conference ground rules prohibited panelists from being quoted by name or company affiliation.

But the big surprise in Miami was the number of industry players talking up a third "L" retention option, which until recently seemed a non-starter.

The structure is more complex in that it would likely require some degree of vertical retention by loan originators, as well as a B-piece buyer, or high-yield account, to hold a riskier horizontal portion.

"I think the market will gravitate to the L," one of the conference attendees said.

A call to Rialto was not immediately returned. (Reporting by Joy Wiltermuth; Editing by Alex Chambers and Jack Doran)