Mount Street managing partner and ceo Ravi Joseph and director Jonathan Banks answer SCI's questions

Q: How and when did Mount Street become involved in the securitisation market?
RJ: Mount Street is an amalgam of a couple of different businesses. We began taking on servicing assignments about two years ago and this business has grown quickly around the emergence of non-bank lenders, most of whom choose to outsource their servicing requirements.

We then acquired the Frankfurt CRE loan servicing operations of Crown Credit Services in 4Q13, which included staff and a portfolio of contracts, which we continue to service. This was followed by the acquisition of the Morgan Stanley Mortgage Servicing (MSMS) platform in 1Q14 (SCI 30 January), which completes a loop, as I set up the original CMBS business at Morgan Stanley.

MSMS was the first European CRE servicer (being established in 1998), the first rated CRE servicer (with S&P and Fitch ratings of 'above average' and CPS1- respectively) and always had a strong reputation for integrity and professionalism. Many of our current investor and borrower relationships were carried over from Morgan Stanley.

JB: We understand how CMBS deals work after many years of managing the Morgan Stanley deals, which is one differentiating factor. Our aim is to look after the entire structure, thereby providing more comfort to bondholders.

RJ: Paul Lloyd, one of the three Mount Street partners, ran MSMS and went on to run Deutsche Bank's and CBRE's servicing platform. Our third partner - Bill Sexton - has deep bricks-and-mortar experience and, in fact, was a CMBS borrower while at Halverton, which brings an interesting perspective to the firm.

We currently service circa £12bn of loans and bonds, a quarter of which is specially serviced and the remainder is performing. About £5bn-£6bn is non-securitised and represents new assets from non-bank lenders.

Q: What are your key areas of focus today?
RJ: The third-party servicing community has worked its way through the business of busted real estate loans over the period 2008 to present. While there was little restructuring experience in the sector prior to the financial crisis, now there is significant experience with workouts.

We're trying to deploy that experience with potential purchasers of loan portfolios. The skill-set is an extension of a special servicer's, but the task is easier in some ways because the restrictions of a bond are removed.

We understand what the costs are for different restructuring strategies and have expertise across different jurisdictions. Investors can leverage their position by having us help them underwrite loans and manage the asset.

JB: There is significant bank deleveraging underway and a slew of NPL sales are expected over the next 12 to 24 months, following a record year in 2014, driven by the ECB's asset quality review and the implementation of IFRS 9 and Basel 3.

French banks are notably absent in terms of non-core asset disposals, while UniCredit and Intesa in Italy have only recently started to set up bad banks in earnest. Spain has the highest volume of NPLs at around €200bn and is expected to remain active, together with the UK and Ireland. And a modest volume of sales is anticipated in Germany.

Q: How do you differentiate yourself from your competitors?
RJ: My background is bond-facing and so I'm very sympathetic to the needs of investors. Investors have three major complaints about the CMBS servicing industry, the first of which is in relation to professionalism and quality of service.

Many doubt whether the right level of skills are being deployed or simply can't tell what is happening behind the scenes. But we're hoping to maintain the strong reputation built by MSMS as a quality servicer. We're staffed by high quality professionals, with extensive CRE experience.

The second complaint is around transparency and the third is around fees. There appears to be a culture of maximising fees by taking fees on the side for mundane tasks like standstills. But we believe that the standard servicing fees are appropriate.

We won't take extra fees that are unnecessary for mundane tasks. If we decide that something needs a fee, we will disclose it so that bondholders can judge for themselves whether we're being paid fairly.

We even back-end the fee sometimes when we have a strong conviction, thereby providing alignment of interest with bondholders.

With respect to the second complaint, we invested in a complete revamp of our reporting platform to make it user-responsive. The CMBS business survives on bond communications and bondholders need to be the ones that set the agenda. What they typically find frustrating is that reporting is so shoddy - it's been done in the same format for 10 years, which is astonishing.

Many investors say that servicer reporting is hard to understand and that special servicers are reluctant to be transparent, but we want to provide the maximum information that we can. It's a very different approach: if we have to keep making more information public, so be it.

JB: Mount Street understands the importance of transparency in the CRE market, particularly following the credit crisis, and we are committed to providing a clear and concise reporting solution. We have created a new suite of investor reports for the Morgan Stanley CMBS deals, incorporating feedback provided by investors over the years. All reports are easily accessible via the Mount Street website, which was recently re-launched to reflect our growing business.

While the E-IRP template is one element of our reporting, we also try to include more explanatory details because often the facts and figures don't provide the full picture around a loan's history, especially if a bond has been acquired in the secondary market. In addition, we try to provide our expectations on exit strategy and so on.

We supplement the information by providing colour on asset sales and leases, as well as working closely with borrowers and cash managers to gather loan level detail and financial data.

Some other special servicers are starting to provide more comprehensive information. Although the typical reporting hasn't changed, there may be more ancillary reports, for example.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
RJ: We often hear that all the value in legacy European CMBS has been extracted and any potential opportunities are now fully priced in. But situations remain where a completely fresh look at a workout or resolution strategy can lead to a different expected value and make a significant difference to where value breaks. For example, if the recovery on a transaction increases from £270m to £300m, the lower tranches exponentially move up in value.

One such instance we've been involved with this year is the Bridge loan, securitised in Windermere X. The class E noteholders were in a position in April to have Mount Street create value with a new workout strategy, but they have since been wiped out by losses.

It has been an incredibly inefficient process that has taken nearly a year and now the controlling class is the class D noteholders. They are still debating whether their position could be worth more if servicing is transferred to a different firm with a different strategy. The bonds do appear to have been undervalued: they have traded up by around 40% since negotiations began.

We feel strongly that there is an opportunity here: we've come up with a path to recover par on the Bridge loan. Because of our conviction, if special servicing is transferred to us, we have committed not to take a resolution fee until the senior loan is repaid at par.

Many deals remain that could potentially be transferred to a different special servicer, but it depends on the controlling noteholders and whether there is a control valuation mechanism. Noteholders need incentives to go through the process: it requires someone to benefit and acquire the tranche and instigate change.

JB: Perhaps investors aren't familiar with the servicing transfer mechanics or are put off by the long-winded processes involved. Although selecting a new servicer is straightforward, all the other bells and whistles take time.

RJ: Investors can also ask themselves whether the current servicer is doing the best job. The answer is almost never yes because a high level of dissatisfaction remains prevalent in the investor community.

We'd like to encourage investors to talk to us about anything. We're happy to do a lot of work to see if we can squeeze more value out of a situation.

Q: What major developments do you need/expect from the market in the future?
RJ: Looking ahead, the big question is whether the CMBS market is coming back and, if so, how to position ourselves as the servicer of choice for new issues. If the market comes back in size, we hope that issuers will follow the lead laid out by investors and the CMBS 2.0 principles. The industry is much more sophisticated post-crisis - both in terms of servicers and investors - so the 2.0 market should reflect this.

CS