Morningstar plans launch of CMBS 2.0 watchdog watchdog

The headline to this article does not contain a syntax error; Morningstar Credit Ratings is going to put together a new risk assessment service for its clients. Morningstar announced the initiative in an email Monday. The new risk assessment will monitor the potential boom in CMBS 2.0 operating advisors. CMBS 2.0 refers to newly structured commercial mortgage-backed securities. CMBS 2.0 differs from pre-bust CMBS deals in that there are more loans pooled and less perceived operational risk. Further, CMBS 2.0 is likely to adopt a European style of specialty servicing: the implementation of operating advisors, who arbitrarily monitor special servicing of CMBS 2.0 deals in the event of loan delinquencies. In pre-bust CMBS, there was a perceived conflict of interest between first-loss bond holders and senior-rated investors. The latter became suspected of motivating timely liquidations as they would receive compensation first in such an event. Risk retention could help balance this potential problem, but proposed rules would place this risk with the so-called B-piece buyer, also the first-loss bond holder. These deals will likely require operating advisors to review asset-level decisions to hedge against investor conflicts. “Therefore, it is our intention to offer Operation Risk Assessments of Operating Advisors once the regulatory proposals are finalized and established,” Morningstar said in the note to clients. The credit ratings agency said its focus on monitoring risks for bond investors can also help establish operational standards, such as this, for the CMBS 2.0 markets. “We believe it is important for all participants in the industry to have a clear sense of the baseline qualifications and expectations for entrants to adequately fill this newly evolving role in CMBS transactions,” Morningstar said. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.