Iona Misheva, partner at Allen & Overy, explores the lessons that the pandemic provided for the European CMBS market

Issuance has been at consistently high levels this year.  This has shown that the asset class recovered quickly from the temporary forces of the pandemic, which resulted in very few deals coming to market in 2020.  In contrast, 2021 has seen near record levels of issuance of euro and sterling CMBS notes.  We’ve not only seen interesting and varied asset classes, from cold storage to social housing, but also a variety of jurisdictions (Spain, France, Germany, the Netherlands, to name a few), some multi loan deals and some dual currency transactions. 

In terms of the key points, ESG has been a massive focus for investors.  Green CMBS, in line with other parts of the securitisation market, is a trend that we will continue to see increasing emphasis on.  In the CMBS space, this started at the beginning of 2020 with the River Green transaction, and has recently continued with the Frost issuance.  While the ESG credentials of a CMBS transaction are very much driven by the nature of the underlying properties, expect to see increasing focus on borrower ESG reporting at the time of origination of a loan and on an on-going basis.

We have also seen increased attention on the level of discretion that servicers have in relation to signing off on borrower requests.  Is the level of discretion correctly calibrated?  Pre-pandemic, there were certain matters that servicers could not sign off on without noteholder consent.  During the pandemic, with an increased amount of borrower requests that were not run of the mill, the servicing documents were continuously tested in terms of what a servicer could and couldn’t sign off on.  This was especially apparent where borrowers sought to defer interest payments on loans.  In recent deals, this has led to increasing levels of servicer discretion, with fewer restrictions on what they can sign off on.  Ultimately, this doesn’t give the servicer free reign, as it will always need to act in accordance with the servicing standard. 

The benefit of a strong sponsor has also really been highlighted during the pandemic.  Rather than deferring loan interest payments, there were a number of instances of borrowers injecting equity into transactions.  This was especially apparent, and needed, in the hardest hit hotel and leisure sectors.  

Coming back to multi-loan deals, there has been recent market hype about CMBS CLOs.  There has been one recent issuance, with several rumoured to be in the pipeline for next year.  This will be an area to watch next year.

So, how do we leave the year?  Quietly optimistic, with steady levels of excitement for next year.