In the second of a series of blogs, in which we address the evolution of CMBS structural features, we will consider the most (arguably) integral form of credit enhancement for any CMBS deal, the liquidity facility.
Liquidity facilities are structured as 364 day committed revolving credit lines that can be drawn by a CMBS issuer
As was common at the time of the inception of the transaction, Danske Bank A/S (Danske) had provided a liquidity facility (LF) on a commercial mortgage-backed securitisation issued by the issuer, Gemini (Eclipse 2006-3) plc (Gemini). Due to the subsequent plethora of downgrades that have followed the financial crisis (from which the liquidity facility provider did not escape), a liquidity stand-by drawing of £64,000,000 was made by Gemini. The liquidity facility provider was entitled under the liquidity facility to recover any increased costs as a result of the application of Basel II (as implemented in Denmark) to the LF. A subsequent withdrawal by Moody’s of the separate rating obtained in relation to the LF caused a rise in the increased costs due to Danske being required to set aside more capital for regulatory purposes.
Continue Reading The Liquidity Eclipse