UK: CMBS 2.0 IN FOCUS: Liquidity Facilities – The Wild Child Of CMBS 2.0

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 to satisfy the payment of any shortfall in expenses, the payment of any shortfall in interest on notes, as well as the payment of any amount owed to a third party that directly relates to the underlying commercial real estate (a so called property protection drawing).  Anyone that is familiar with the 1.0 vintage of deals will testify that such transactions exhibited a huge degree of variance when it came to the structuring of the liquidity facility, which can largely be attributable to the myriad of different CMBS 1.0 structures as well as the need to accommodate individual liquidity facility provider requirements.

With the emergence of CMBS 2.0 many market participants had hoped that there would be greater standardisation of these facilities and a higher degree of uniformity adopted between individual deals.  In that vein, market participants will no doubt welcome the vastly improved documentation which includes fixes for many of the mechanical shortcomings that were endemic in CMBS 1.0.  However, when it comes to actually creating uniformity with respect to key structural features relating to liquidity facilities, the new deals continue to be plagued with a similar level of heterogeneity as was the case with the previous deals.

Indeed, a structural vagary that was rife in CMBS 1.0 was the fee structure associated with a standby drawing.  Historically these fees were structured in such a way that following a standby drawing either: (i) the liquidity provider received the same commitment fee as well as any income derived from the investment of the standby loan in eligible securities; or (ii) the standby loan was treated as if it was a normal liquidity drawing and thus the provider received a full amount of interest (although typically that portion of interest that exceeded the commitment fee was subordinated to payment of interest on notes).  The new deals in the market reveal that this vagary is still rife with a compendium of different interest payment structures currently being employed which not only constitute a variance of the two structures outlined above but also new structures which include in one instance a structure whereby interest on standby drawings ratchet upwards over time.

Similarly with regard to appraisal reduction, there continues to be a range of mechanisms which mitigate liquidity provider concerns stemming from underlying stress in real estate values.  In this context it is noted that a number of deals continue to follow the traditional "appraisal reduction" approach, where the amount of a liquidity facility is reduced by an appraisal reduction factor that is calculated by applying a haircut to the underlying value of the real estate.  Other deals have adopted a more binary mechanism with the inclusion of a complete drawstop that is triggered when the underlying commercial real estate is determined to be insufficient to cover all amounts payable to the liquidity facility provider as well as all liabilities (including indemnified losses) that rank senior. Although both approaches have their merits, nevertheless this again demonstrates that a modicum of variation continues to be present in the new era of deals.

However despite this continued trend of variation, when it comes to drawings to cover interest shortfalls, the new transactions are (not surprisingly) consistent on this point. As market observers are aware, one of the most striking nuances of CMBS 1.0 compared to other structured products relates to a draw on a liquidity facility to cover an interest shortfall.  Unlike other asset classes where the draw on a liquidity line was limited to the amount necessary to keep various classes of notes current, in the case of CMBS, drawings were instead dependent on whether there was likely to be a shortfall in the amount of interest received on an underlying loan.  The corollary of this is that despite there being sufficient interest received on the underlying loans to service the payment of coupon on notes, nevertheless there could still be drawing on the liquidity facility if there had been a shortfall in the payment of interest on a loan, thus a welcome feature for anyone entitled to receive excess spread from the deal.  Given the inequitable position of such structures, this nuance has now been eradicated and all new deals only allow interest shortfall drawings to cover the shortfall in the payment of interest on notes.  In effect the new vintage of deals has removed the ability for there to be excessive liquidity drawings to meet loan interest shortfalls and thus the beneficiaries of excess spread are now only entitled to receive "true" excess spread (see CMBS 2.0 IN FOCUS: Class X – a Class Act!).

It would therefore appear that when it comes to the structuring of liquidity facilities these can be considered the wild child of CMBS 2.0.  Although the structuring of liquidity facilities has definitely changed for the better, certainly one feature that has not changed is that it in today's market there is still a great deal of variety between different liquidity facility structures.  In an ideal world, CMBS 2.0 would have heralded in a new dawn of deals where standardisation of this important credit enhancement tool would have been the norm, however instead we are confronted with a market where one size certainly does not fit all.

Although critics of the CMBS product could readily cite the failure to standardise these liquidity facilities as a flaw in the new vintage of deals and an opportunity missed by the architects of CMBS 2.0, the reality is that this heterogeneity can be firmly attributable to the regulatory cost of the liquidity facility provider of providing these credit lines.  Under Basel III (European Regulation (EU) No 575/2013, 26 June 2013) liquidity facilities have become incredibly expensive for CMBS structures and therefore arrangers of pretty much all new rated CMBS 2.0 deals have had little choice but to provide the credit line themselves or via an affiliated company.  In effect, by forcing the arrangers to keep liquidity facilities "in-house", the regulators have inadvertently removed the commercial tension and cross pollination that is essential to create a standardised credit enhancement tool and with it the opportunity to further standardise the CMBS product.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.