DBRS Updates Pari Passu Index
CMBSDBRS has today updated its Pari Passu Index for year-end 2008.
In 2008, there were only four new loans added to the index, which is in part due to the lack of new issuance and loan origination. However, many of the commercial mortgage-backed securities (CMBS) issues in 2008 had a piece of an existing note contributed, thus allowing us to identify the whereabouts of several more pari passu notes. The index identifies 31 pari passu notes that either have not been securitized or are not known to be within CMBS.
While originally this structure provided originators with an effective means of executing large commercial real estate loans and allowed CMBS issuers and investors to diversify single-loan concentrations, it may have led to more complicated loan structures. These pari passu loans are ultimately controlled by one pooling and servicing agreement and thus one special servicer. However, any loss associated with these loans would be distributed pro rata among the various pari passu notes contributed to the many different CMBS transactions. The interests of the non-controlling pari passu noteholders may not always be aligned, contributing further to what the Wall Street Journal so eloquently coined as “tranche warfare” in a defaulted loan situation.
When one looks at the financials reported for each of these pari passu notes in the various CMBS transactions, it is not uncommon to see different financial metrics reported for the same loan. All of the pari passu notes of each loan are secured by the same collateral, meaning the financial metrics should be the same for all notes of like payment priority. Going forward, it is our hope that the industry can focus on the financial reporting consistency for each of the pari passu notes in order to boost investor confidence in some of these very highly structured loans and to avoid any surprises in performance.
To request a copy of the Pari Passu Index, please contact us at info@dbrs.com.