A Guide to the Law of Securitisation in Australia - Clayton Utz

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13 Commercial mortgage–backedsecurities13.1 Overview of CMBSA commercial mortgage–backed securities transaction typicallyinvolves an issue of debt securities, cash flows in respect ofwhich are underpinned by the rental income of pooled assetsconsisting of a cross-collateralised or cross-defaulted portfolio ofreal estate. The pooled assets are secured for the benefit ofholders of the debt securities.Payments are limited to the proceeds from the underlying assets.The secured assets are isolated from other operations of theentity through the creation of a special purpose entity (SPE) orthe use of managed investment schemes.The security pool may comprise the same property type ordifferent types of real estate such as commercial, industrial and/or retail properties.The rating agencies play a critical role in the CMBS market. Therating agencies examine the characteristics of the underlyingloan pool such as the debt service coverage ratio (DSCR); theloan-to-value ratio (LVR); the quality and diversity of the pool ofproperties supporting a particular CMBS; the level ofcollateralisation provided; credit quality of the tenant(s); thegeographical concentration; and the weighed average leasematurity of the collateralised pool.CMBS may provide a lower cost of funding the underlyingproperties, as compared to more traditional bank debt, dependingon the market for CMBS at the time.13.2 Structural featuresStructural features of a typical CMBS include:13.2.1 Further indebtednessThe SPE may be allowed to raise additional debt by issuingfurther debt securities secured by the collateralised pool ofproperties provided that the further issue of debt securities willnot have an adverse effect on the existing debt securities. Theratings agencies will consider the strengths and weakness of anynewly-acquired properties which are proposed to be added to thesecurity pool as well as the nature of the proposed furtherindebtedness.13.2.2 Amortisation and refinancingUnlike residential mortgages that are fully amortised over a longtime period, issued CMBS are usually interest only with noamortisation of principal until a scheduled maturity date. Ifrefinance is not available at the scheduled maturity date, withthe consequence that the CMBS are not redeemed, thetransaction moves into a refinancing period during which theunderlying properties may be sold under the security trustee’sdirection.Typically, if the CMBS are not fully repaid on the scheduledmaturity date then a default is taken not to have occurred.However, the SPE may be required to initiate the sale of theunderlying properties and utilise the proceeds from the sale toredeem the notes. The refinancing period is the term betweenthe scheduled maturity date and the final maturity date, at whichpoint the principal of the CMBS must be repaid in full.During the refinancing period, the coupon on the CMBS willtypically increase by a pre-agreed “step-up margin”.CMBS documentation often allows the security trustee to waivecompliance with the sale process if the security trustee issatisfied that:• the issuer has a proposal in place which will enable animminent refinancing of the CMBS; and• if that proposed financing were to fall over, there would besufficient time remaining prior to the final maturity date toundertake an asset sale sufficient to realise enough funds tofully repay holders of the CMBS.13.2.3 Cross-collateralisationDiversification of the underlying collateral is one way of reducingdefault risk. Another way to reduce default risk is to use crosscollateralisation.In cross-collateralisation or cross-defaultedpools of properties, the cash flow from each property jointlysupports the entire pool, a default on one property triggers adefault on the entire pool and the total liquidation proceeds fromeach and all of the properties are available to repay the debt.This will usually not be available in a multi-borrower CMBSwhere the underlying properties are ultimately owned by nonrelatedparties or different management investment schemes.13.2.4 Right to deal in propertiesA transaction can be structured to allow the SPE to both acquirefurther properties as well as dispose of existing properties, eitherwithin agreed criteria prior to the scheduled maturity date orsubject to confirmation from the rating agency that there will beno adverse impact to the rating of the Notes.Further acquisitions may be funded through the issuance offurther rated securities, subject to rating agency confirmation.71
Some CMBS transactions allow the issuer to acquire newproperty which is not secured in support of the CMBS, providedthat:• the financing of the acquisition of the new property is strictlylimited recourse to the new property only;• the rating agencies are notified; and• the acquisition does not have an adverse impact on the rentalpayable in respect of the existing security pool.This gives issuers some flexibility in relation to the portfolio ofproperties supporting the CMBS, an important consideration inmany instances, particularly with listed property trusts.13.3 Other relevant considerations for CMBS13.3.1 InsuranceThis will obviously be important having regard to the underlyingassets supporting the CMBS.Typically, the rating agencies will consider the nature and extentof the insurances as well as the credit worthiness of theinsurer(s).13.3.2 Capital expenditureThe relevance of capital expenditure to a CMBS transaction willdepend upon both the type and condition of the underlyingproperties.It may be necessary for a capital expenditure fund to beestablished, and/or for capital expenditure to be taken intoaccount in the cash flow waterfall(s), particularly if the ratingsagencies are of the view that this is necessary to ensure that thevalue of the underlying properties is maintained and that in anenforcement scenario noteholders will not have to effectivelyfund a substantial amount of capital expenditure in order toattract and/or retain tenants or attain a sufficient sale price.The next section of this publication examines some of the issuesrelevant to synthetic securitisations in Australia.72
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12.7.3 Euroentitlements............
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1 General overview of the nature of
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An interest in a managed investment
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142.3.4 Provision of a financial se
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3 The disclosure and civil liabilit
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18The statutory source for this ste
Page 21 and 22: The implication of this approach in
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Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
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Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
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Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te
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A Guide to the Law of Securitisation in Australia - Clayton Utz

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