Rating Agency: CDO Servicers Face Challenging Times.

NEW YORK -- Rating agency Standard & Poor's says that the growth of collateralized debt obligation issuance poses challenges for the servicers of real estate loans that are pooled into these deals.

S&P said the "inherent complexities" of CDOs requires special consideration in evaluating the servicing of CDO assets. S&P recently issued a report detailing how it evaluates servicers and special servicers assigned to manage the cash flows and collections associated with loans backing CDO transactions.

Michael Merriam, a director in S&P's servicer evaluations group, said in a news release that the structure of CDO transactions usually involves the participation of several parties working together to ensure that the servicing functions are managed well.

"In light of the growing presence of CRE CDOs in the market, we have broadened the scope of our servicer evaluation to determine the operational capabilities of servicers administering CRE CDO-type loans and participating in rated CRE CDO transactions," he said. "Specifically for CRE CDOs, we distinguish among the following roles: the servicers, who may be referenced as the transaction's master servicer, and the special servicer, which is a role normally assumed by the CRE CDO's collateral manager."

He said that S&P considers how well a firm's administrative and portfolio management capabilities correspond with and can support its planned role and duties for the transaction when evaluating CDO servicers.

In order to serve as a CDO special servicer for commercial real estate loans on an S&P-rated transaction, a collateral manager must either be on S&P's select servicer list as a commercial mortgage special servicer or be qualified by S&P for such a role. Concurrently, the named servicer for a CRE CDO must be included on S&P's select servicer list.

However, Mr. Merriam said that collateral managers without an S&P servicer ranking can serve as a subservicer for a transaction and can be delegated many servicing functions as long as the named servicer for the deal is an S&P-rated commercial mortgage servicer or master servicer.