Street Aims to Reboot CMBS

"Wall Street has learned a lesson from the battles that have erupted for control of the bankruptcies of hotel owners Extended Stay Inc. and Innkeepers USA Trust: There has got to be a better way to build a commercial mortgage-backed security.

The strategies used by some investors to gain control of these failed companies has exposed flaws in the structures of CMBS, the commercial real-estate industry's favorite boom-time financing tool. But now, as investment banks revive the market for the securities, they are making structural changes designed to close these loopholes and curb these tactics.

Guidelines for hiring and replacing special servicers are 'clearly changing so that it's not just in the hands of one [investor] class,' said Anup Sathy, a partner specializing in corporate restructuring at law firm Kirkland & Ellis."

This article appeared in its entirety in the November 10, 2010 edition of The Wall Street Journal.