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Calling Balls and Strikes: Batting it Around with Moody’s Dan Rubock

• Dechert LLP

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In this episode of Dechert 4 Real, hosts Jon Gaynor and Sam Gilbert welcome Moody’s Ratings’ SVP and former Dechert lawyer Dan Rubock to the podcast for an in-depth look at his career shaping how the agency evaluates the legal architecture of CMBS deals. They also go extra innings on insurance risk, data centers, Canadian CMBS and AI, and share some favorite sports memories.

Jon Gaynor:

Hello, and welcome back to the Dechert 4 Real podcast, where we discuss current issues and trends in commercial real estate finance. We aim to bring market commentary about developments, updates you can use, and maybe a little bit of banter along the way. I'm Jon Gaynor, a partner based in Dechert's Philadelphia office.

Sam Gilbert:

And I'm Sam Gilbert, a partner based up in the Boston office.

Jon Gaynor:

In this episode, Sam and I are joined by Dan Rubock, a senior vice president at Moody's ratings and head of the commercial real estate legal team. Dan has spent over 25 years at the intersection of law and structured finance shaping how Moody's evaluates the legal architecture of CMBS deals. He's also a former Deckert lawyer. So this is something of a homecoming. We're going to have a broad conversation covering Dan's career, what is happening with Office, distress, insurance risk data centers, Canadian CMBS, and how AI is changing the

Sam Gilbert:

And before that, in our 411 segment, we'll talk ratings process. about tokenized securities and a major regulatory green light for capital treatment.

Jon Gaynor:

But first, let's get 4 real with the hosts, Sam. We're keeping it simple. Talk to me about your favorite sports team and maybe a memorable sporting event you attended for them.

Sam Gilbert:

My favorite team since I've been a kid, has been the Red Sox. Obviously, as a Boston kid growing up, and I would have to say my most memorable sporting event was the 2004 World Series. Of course, obviously breaking the curse, I was lucky enough to go to a number of the games that I was at. Game four in St Louis, oh wow, when they clinched it. So after 25 years or so of not seeing much winning in Boston, it was nice to be able to sort of see it happen in person.

Jon Gaynor:

I am from Philadelphia. I feel as though That's really special for me. working at Dechert in Philadelphia, I am obligated to say the Eagles. I think it's probably true. There's a connection there. When I was a first year associate, there was an opening at the Eagles-Giants game, where Dechert was bringing a bunch of clients to go. And so I snagged a ticket and was sitting like at seats I could never afford on my own, like very close up on, like, the 50 yard line, with a bunch of clients eating cheesesteaks on the firm's dime. And it was such a, it was both my first Eagles game and a really cool event. And so that was pretty fun. All right? I think that counts as getting 4 real. Let's move on to our 411, segment. And look, I know what you're thinking, two dudes on a podcast about to talk about the blockchain, but before anybody tunes out or checks whether we've pivoted to crypto bros, this is not that. This is about what the federal banking regulators just did to remove an obstacle to tokenizing debt securities, including potentially securitization certificates.

Sam Gilbert:

Yeah, that's right. On March 5, the Fed, the OCC and the FDIC jointly issued an interagency FAQs OCC bulletin 2026-7, and the headline was pretty simple, if you tokenize a security and the tokenized version confers legally identical rights to the traditional version. It's going to get the same exact regulatory capital treatment, so same risk weight, same capital charge, no penalty for the technology.

Jon Gaynor:

So until now, there was a real uncertainty on the bank side, if a bank wanted to hold a tokenized treasury, a tokenized agency, MBS certificate, or thinking down the road a tokenized CMBS tranche, there was a legitimate question about whether the capital rules would treat it the same as the paper version, or, more likely, the version on DTC. If the answer was maybe not, banks had no reason to touch it.

Sam Gilbert:

Yeah. And the guidance also confirms that So this guidance answers that definitively. tokenized securities can qualify as financial collateral for credit risk mitigation, same haircuts as a conventional instrument. So if you're thinking about repo lines, warehouse facilities, any sort of back leverage where the securities are posted as collateral, the tokenized version now has the same regulatory footing, and it's blockchain neutral, permissioned or permissionless. It doesn't matter the capital treatment follows the legal rights, not the technology stack.

Jon Gaynor:

All right. Sam, so what does this mean for us? There's already market participants using distributed ledger technology and securitization, so for loan level payment reporting or investor reporting packages, the infrastructure is being built out more generally, and the guidance removes what was arguably the biggest regulatory barrier to banks participating on the buy side of tokenized securitization products.

Sam Gilbert: But now the catch:

the standard is legally identical rights, so banks still have to satisfy existing Investment Authority requirements and evaluate operational risks, things like cybersecurity, custody, smart contract risk. The guidance doesn't wave any of that away.

Jon Gaynor:

But the signal is clear. Banking agencies are saying that we will not let technology be the obstacle. If the legal substance is the same, the regulatory treatment is the same. Deloitte put out a projection saying that tokenized real estate related assets could hit over US$2 trillion by 2035 so whether or not you buy that number, the direction of travel is obvious. And now the regulatory framework is catching up.

Sam Gilbert:

All right. And now on to today's guest. Dan Rubock is Senior Vice President at Moody's Ratings and head of their commercial real estate legal team. He spent more than 25 years at Moody's focusing on the legal and structural issues that shape credit outcomes in CMBS, everything from bad boy carve outs and non con opinions to inner creditor agreements, ground leases and terrorism insurer requirements before Moody's. Dan practiced law at Cadwalader, White and Case, and like Jon mentioned, right here at Dechert. So Dan, welcome to the Dechert 4 real podcast.

Dan Rubock:

It's a real pleasure. being here, Jon and Sam.

Sam Gilbert:

It's great to have you back.

Jon Gaynor:

All right, Dan, before we jump in. Let's get 4 Real with you. Can you tell us what your favorite sports team is and maybe a memorable sporting event you attended?

Dan Rubock:

That's a real softball question, Jon, but I'm going to give you a hard ball answer. Literally. My dad grew up in the South Bronx, two miles away from Yankee Stadium. The first game I went to with my uncle when I was eight years old. Was a Yankees game in the original House That Ruth Built. And maybe this is TMI, but between my freshman and sophomore year at college, my summer girlfriend was the next door neighbor of Hall of Famer pitcher Whitey Ford. No, I never met him, but she said he was a really nice guy. Anyhow, I remember the first game vividly. It was Sam against the Boston Red Sox, and Yankees won seven to four. I was in the bleachers, and it was really, really hot. That's what I remember. Sorry, Sam.

Sam Gilbert:

The Yankees beating the Red Sox is what happened a lot back then, so.

Dan Rubock:

Back then. They they managed to get out of that curse.

Sam Gilbert:

Yep. Thank God.

Jon Gaynor:

All right. Well, you two. I can feel the tension in the podcast, is it, but we're gonna try to move on. So Dan, I'm sure a lot of our listeners would really love to hear about your career arc. You obviously practiced law. You'd spend a little bit of time in private practice, then came back to law and then moved to Moody's in 1999 Do you want to just tell people about your arc and how you got to where you are today?

Dan Rubock:

Well, I started out as at litigation, at White and Case, and then I moved into CRE. And then at Dechert, I was in CRE, and then litigation, mostly real estate litigation. And in 1993 I went to be general counsel of a steel trading and fabrication firm that owned the only operating tin smelter in the United States, and then was recruited back to CWT to Cadwalader to go back into cre just as CMBS was taking off in the mid 90s.

Jon Gaynor:

So from tin smelting back to the salt mine, got it.

Dan Rubock:

Absolutely and, you know, I appreciated the wide variety of litigation practice, but I really like the tangibility of real estate and the coming together of parties and transactional work, rather than the sandbagging of opponents in litigation. With all due respect to my litigation friends. Why did I leave big law? I could point to a precise

day:

March 11, 1999. There was an eight alarm fire at my Upper West Side apartment building that actually landed on the front page of The New York Times the next day. New York Times doesn't cover fires, but this was an eight-alarm fire in the front page of the Times. I got a call from my wife saying the building is burning. So I told my senior partner that I was working for that I had to leave because my wife just told me the the client that our building's on fire, so we're not going to building's on fire. He told me, before I left, that I had to first call a certain client and apologize to them that I get that thing done on time. wouldn't be able to get back to them that afternoon. I joined Moody's six months later. So anyhow, that was the actual transition. But you know, it was a it was an evolution, actually, and I absolutely respect the choices that you guys made.

Sam Gilbert:

Right. Well, so you've been at Moody's for a while now, right through 911, the GFC, Covid, the office reset. How has the role changed over that time? And maybe, how are things like the Credit Rating Agency Reform Act and the Dodd Frank kind of changed the way you guys operate?

Dan Rubock:

Substantially. I mean, first of all, again, from different from private practice, I don't have a specific client that I advocate for zealously. What I advocate for zealously now is credit accuracy. In other words, my client is getting the answer right, rather than an individual entity. I also get an extraordinarily broad view inside the market. At Moody's, we see every deal from every angle, insider's perspective, it's thrilling and never boring, and that's why I'm still at it. My role really hasn't changed much since the turn of the century. Literally, I call balls and strikes like justice Chief Roberts kind of says, right? The pitches, though, have gotten trickier and more regulated, and there are a lot more. More of them. PSAs, just to give an example, are back in the Bronze Age, when I joined, were 175 or 200 pages long. Now they're six or 700 pages, literally before the credit rating agency Regulatory Act of 2006 things were so much more free wheeling, both in a positive and a negative sense, we were able to patch methodologies together and respond very swiftly to new advances and ideas and regulation, particularly after the GFC and Dodd Frank made things more process sensitive and more deliberate, which I guess is a good thing. I think we can't structure deals like we kind of didn't in a way before the GFC and Dodd Frank, we could only react saying, What's credit neutral or credit negative? Hey, Sam, how often have you heard the words credit positive from my mouth?

Sam Gilbert:

Yep, this is the first time I've heard them. So I've always hoped to hear them on a call, but not quite yet.

Dan Rubock:

Now you've heard it, and maybe hopefully, this won't be the last time.

Jon Gaynor:

So talk to us a little bit about what your day to day looks like now.

Dan Rubock:

Well, because 85% of the infrastructure, of the legal infrastructure, in a sense, has already been cemented. It was exciting 25 years ago, when things were still being developed and there were new ideas, there were new ideas now, but really, things are cemented. So prior rated Moody's deals are the base against which a new deal is blacklined. So we analyze what liberties have been taken, I mean, I'm sorry, negotiated points you guys have made from the baseline deal, which we've already put through the analytical ringer. So we look at black lines on the day-to-day kind of basis. Now things are different, you know, week to week, of course, yep.

Jon Gaynor:

Imagine that 15% differential, though, is where a lot of the exciting stuff is happening. And you get to, you get to bring out the credit negative redlining all the time, yeah.

Dan Rubock:

The reason is that there's such movement and competition, that there needs to be an angle that a bank has to take to get a competitive advantage. So there's not only changes to that 15% but you know, sometimes changes are attempted to that infrastructure, and sometimes they really are successful, and I could get into that later, when, when you could ask me, I'm sure about insurance?

Jon Gaynor:

Oh, sure. So maybe in this hints at kind of like an issue for people who are newer at this, or maybe they haven't really fully understood the process before. How does Moody's develop the legal and structural criteria that end up feeding into a CMBS rating? Like, where does that work start and how does it become your policy?

Dan Rubock:

We do it very carefully, and at this point, there's so much history and infrastructure that 85% of the work is already done. But it's the constant movement, the maneuvering and arbitrage in the market that really the changes from legislatures and cases in the courts that make my day to day interesting. We follow developments daily and note those that appear to have possible credit effects and then put them down for internal discussion. We're a layered organization, so we have credit policy group, we have a methodology development group, we have a methodology review group, and then the Moody's ratings board, which has outside members, has to approve all methodologies so and of course, the SEC monitors our procedures gone.

Jon Gaynor:

Are the days where you can, just like on a solo basis, throw out a 15-page mezzanine loan methodology and have that be published law?

Dan Rubock:

Well, I did author our mezzanine loan methodology in 2007 but it wasn't just me. There were a couple of review processes, sure, okay, but nowhere near the infrastructure and levels that we have now.

Sam Gilbert:

And as part of that infrastructure, maybe talk a little bit about the legal work and the structural work on your side, and then the the credit analysts on the other side, and how those perspectives kind of come together on the rating committee?

Dan Rubock:

Well, we have really intensive, focused, deliberative discussions. I mean, it's very, very spirited. We have gatekeepers, and we have pre-committees, and we have committees, and we have post-committees. We have formal committee memos that need to be circulated 24 hours in advance. The committee has to be properly formed and appropriately representative. The chair has to certify that that's the case. The lead analyst presents, and decisions are made by majority vote, where the most junior members vote first, so that they could express their opinion. And when I was recruited, I actually rated some SASB deals and was lead analyst on all CTL deals until like about 2010 and I had to learn credit, which is so importantly informed how I look at and apply the legal concepts that are embedded in our criteria and things really are, as lawyers say, you know, a mixed question of law and fact, or here, law and credit.

Jon Gaynor:

So. Yeah, as market practice shifts, how do you guys adapt? Like you were talking about people trying to take liberties with the prior deals. But I imagine people are constantly trying to tell you, Well, hey, things have changed. Now. We do this all the time.

Dan Rubock:

First of all, I was joking with take liberties. We only, again, look at strikes and balls and call them and there are negotiated points, which we then compare against our criteria. You know, a large part of my week, first of all is the fun part is being pitched by investment bankers and lawyers on new products or packaging or waterfalls or provisions before they hit the legal docs that you guys draft. Bankers and lawyers brainstorm with us whenever they have these new visions or approaches or concoctions from a credit neutral and we look at it from a credit neutral point of view. Remember, we can't structure deals. We can give hypothetical guidance based on our published criteria, what would be credit neutral, and the market evolution doesn't make anything credit neutral. We don't follow the crowd in that way, if our yardstick, that's based on existing structure, yields a certain answer, just because the market shifts, doesn't mean it's credit neutral, but it doesn't mean that we're inflexible like I think, as John Maynard Keynes said, you change your opinion. He was accused and he said, Well, when the facts change, I may change my opinion. What do you do, sir? So we can be flexible and we change our view if it's justified. And so we do have rating methodology changes. I mean, when I came there, there was the SASB, the single asset, single borrower, methodology. 1999 it lasted for 15 years. 2014 was a major revision. And then in 2021 there was another major revision. We look at what the market has, and we adjust to that reality, but we still look at what's credit neutral.

Jon Gaynor:

I'm still cleaning out two independent directors to one independent director in deals, so thanks for that. Absolutely.

Dan Rubock:

Well, the two independent director actually came when I was at Cadwalader, when our bankruptcy, the head of our bankruptcy group came into my office and said, Moody's is now requiring two independent directors, can you imagine? And I didn't know I was going to be at Moody's at that point. But what we now have is, you have the idea, the concept between two independent directors was two people can, like, you know, form a bulwark against pressure. But now we look at and we have one independence director, as long as they come from an institutional, nationally recognized corporate service provider who gives the institutional stability for that.

Sam Gilbert:

And they're not an immediate family member.

Dan Rubock:

And they're not an immediate family member.

Sam Gilbert:

I that's, I was thinking of that this morning, because I struck the word"immediate" from a loan agreement. So, you know, you've talked about sort of the evolution of SASBs. There's been a real shift in the last few years to agented SASB deals, right where the rating agency process is effectively done before the loan closes. We used to close deals and then bring them to market. How do you view that shift? Does it lead to a better process, maybe for everyone, or better structural terms?

Dan Rubock:

Again, I can't comment on what better structural terms are. I can only say what is credit neutral,

Jon Gaynor:

Or credit positive?

Sam Gilbert:

I'll get him.

Dan Rubock:

I'm sure credit positive will come out of my mouth on an official basis.

Jon Gaynor:

At some point, we're going to splice it together.

Sam Gilbert:

Use AI to edit you.

Dan Rubock:

Okay. Well, you know, in an agent a deal, obviously, by definition, the bank doesn't take market risk, right, which is hard to hedge completely against for but you know, for a closed, non agented deal, you know, the margins aren't as great, but the risk to them is less right. But the interesting effect it's had on credit neutrality for legal issues is that it's made the Bowers economic interests in some ways aligned with the lenders. So now they they directly feel the sting of dings, as I call them, and there's, you know, it's a bit like my young kid some years ago when I said, You can't do that. And they responded, what are you going to do if I do do that? What's the price? Right? And so the big borrowers now want to get into our what's called One minus one bucket, which is our lowest legal penalty bucket, and they know precisely the price of conforming to the credit neutral legal criteria. So there's it's empowered, their agency, in a sense. And so for us, it's interesting they they want to get into a lower legal penalty bucket, yeah, rather than the bank taking that risk, right?

Sam Gilbert:

No. It's certainly been a sort of a seismic shift in how we originate these loans.

Jon Gaynor:

So it takes things out of the like, "I don't want to do that" to "Here's what it costs to do that," which I think ultimately, like, you know, sometimes some lawyers lose track of the fact that we're in the business of helping mitigate and make risks work for our client. And, like, keep things. Acceptable and understanding the trade offs. And I'm always, I've always been a big fan of alignment. That's why I think serious CLOs are such a good technology, right? There's alignment between the sponsor and the investor. So I want to talk a little more about structure, quality and stress testing, and we're on the topic of sasbs. So you may not know this, but we wrote about in 2018 you do know this? You published this report that got a lot of attention about loan structural quality that was eroding. You may not know that Rick Jones, one of our former partners on his you know, infamous crunch credit blog, wrote a piece just completely glorifying this and like explaining how important and seminal it was. So there you go. You got that going. We've been through a lot of stress cycles since then. Do you think that those five pillars you identified have continued eroding since then? Has it played out? Have you been proven right?

Dan Rubock:

Well, first of all, it's nice to know we get some eyeballs on our ink, so that's gratifying. Yeah, that article was key pillars of loan. Structural qualities are eroding, especially in single borrower deals long title. But it talked about bad boy guarantees being watered down. It talked about net worth covenants decreasing caps being put on property release provisions being weakened, allowing more cherry picking qualified transferee provisions were weakening and cash sweep triggers as well. I heard it did have an effect on lending for a bit, and maybe its effect still echoes today as stopping a slide. But remember, Moody's is not here to prevent a slide. We just call balls and strikes, but we will remind the market when strikes are turning into balls too much. And I do wish I could talk to Whitey Ford on his opinion on these baseball metaphors that I'm throwing.

Sam Gilbert:

Well, I do. I have that report on my desktop, because we use it all the time, really, those five pillars when we're negotiating or pointing things out.

Dan Rubock:

It probably does have a, you know, and again, unintended effect on borrowers saying, Look, this is this is what the criteria are. And since deals are being agented, that hammers home the point.

Sam Gilbert:

Yeah, no, it's very helpful in that, in that context of trying to get people to get to credit neutral.

Jon Gaynor:

So origination volume is going crazy right now. You were saying this earlier. You're you're seeing a large number of pitches, because we're on baseboard metaphors, whether we like it or not. Last year, we saw 125 billion plus and new CMBS issuance. When you've got that much going on. Do you find that structural quality is starting to slide as people kind of compete against each other and then in new deals. Right now, what are you seeing?

Dan Rubock:

Well, Jon, in the past, we've seen things get frothier as competition among the lenders gets more intense, as volume increase, maybe with the rise of private credit and non bank lenders, there's more supply available for the lending demand. But recently, we haven't seen a market deterioration in legal provisions, maybe the agented alignment of interest. Thing I mentioned is keeping things in check in the SASB market, the conduit market has very, very different dynamics, of course, and I don't think things have changed much there in the last few years. But of course, the action in CMBS now is in SASB

Jon Gaynor:

That's right, that's where a lot of the pressure is. And I guess the five-year paper that had been being produced so much lately. So, you know, I guess we'll see when that stuff starts to get refinanced.

Sam Gilbert:

And maybe to sort of focus in a little bit more on some deal terms. How important is sponsorship versus the collateral itself. I mean, can a good sponsor maybe support a not so good property, or vice versa?

Dan Rubock:

It I'm going to sound like a lawyer here, rather than a credit analyst. It all depends. It does depend who your borrower is. I mean, it depends who your landlord is. It's so important that directly reflected in our methodology, actually, with the qualified transferee criteria. You want any potential buyer of the property to be somewhat similar to the borrower you made the loan to, don't you? Right? Wouldn't you rather have your borrower be Simon Properties? Well, would you rather have John's pizza? By the way, I do have I want to make a plug John of Pizza Fenice near me, and they make some really yummy Detroit pizza. So maybe you just want to tell you a qualified transferee, Yeah, yes.

Jon Gaynor:

How do you view additional debt, whether it's true mezzanine financing or preferred equity? How does that change your analysis? Where does the line between acceptable subordinate leverage and something else sit at?

Dan Rubock:

Well, let me be a little in the weeds here. We have a clear approach for the last 25 years that there's a similarity between mezzanine debt and debt like preferred equity, and we treat them credit-wise the same. We apply what's called a leverage penalty to any additional hard mortgage debt, and that's in our methodology. But it's only 1/3 the penalty if you have mes debt or debt like preferred equity, because it's not the mortgage, it's it's, you know, layered above that doesn't cause a default on the mortgage itself, right? So, real pref eq, we don't apply any penalty to

Jon Gaynor:

What's real pref eq?

Dan Rubock:

Real pref eq is in our methodology, it's a hard coupon and or a hard maturity and consequences for failure to meet one or the two or both, like a buy sell or a forced takeover or punitive increased interest rates. So that's really effectively like a foreclosure, in a sense, right failure to meet a financial term, and you lose the property or control the property. So we look at that. That's the distinction we make for real preferred equity and death-like preferred equity.

Jon Gaynor:

But imagine if the pref equa holder is John's pizza. You could be getting that good deep dish pizza as your borrower now.

Dan Rubock:

Now this is real inside baseball, you have to have in a mezz loan into creditor agreement. For instance, you know you have qualified transferees, or you have, you know who the mezz lender may be, who is going to be your borrower if they take over, so that that also enters into the calculation.

Sam Gilbert:

Absolutely. We haven't mentioned office yet, but we've, we've talked about in every podcast, but the market seems to be bifurcating pretty sharply between sort of trophy, Manhattan office on one side and everything else on the other. Does the structural quality track that same split? Are you seeing a different picture?

Dan Rubock:

Look you have, you know, to use the latest lingo, K-shaped, right? You have bifurcation between good properties, trophy properties, and second or third tier, and there's a hollow chasm between the two that's that's ever widening. And you know that's in retail, particularly in office, because post-Covid, but yeah, you're having some interesting issues that developed with covid. Return to Office is a is a factor that's going to be developing. But, yeah, I mean, you do have issues with, with office.

Jon Gaynor:

Yeah, issues, yeah, I think we're at 12.3% cm office, CMBS delinquency right now, special servicing for Office loans is at 17.1% and that's in, you know, an overall 7.5% CMBS delinquency, at least according to the numbers I pulled and prepped for this. So, yeah, a little, there's a there's froth, not frost. Froth is good, right? I guess there's, there's churn. What's the, is there a baseball analogy for a bad time?

Dan Rubock:

I wish Whitey Ford was here.

Sam Gilbert:

Yeah. Great. And those are just in the US, those numbers, I think?

Jon Gaynor:

Right, yeah, that's right. That's right. It does make you wonder how all of this is going to play out over time. For a while, people were putting more office properties into deals in order to deal with the fact that retail was having a bit of a meltdown. And now, over time, we're seeing that the concentration of office in these existing portfolios is now a problem, and in some sense, some types of retail are enjoying a bit of a recovery. So how do you think about those sort of kind of, like, property concentrations and those sorts of like, you know, targets or diversification elements that that can fit into how people are looking at collateral pools?

Dan Rubock:

Well, our models consider so many different factors and diversity and concentration and other things, of course, are a factor, one of the many factors. You know, we do apply different cap rates to different property types. And so, you know, we think that our rating approach is sensitive to these types of permutations and combinations of loan defaults. So you know no prediction is perfect, and you know we do upgrade and downgrade deals. You can't have just one rating for a deal that is there forever, because no one can predict. You know the future perfectly, but we respond to market realities, but we think our approach and our models are robust enough to include many, many different types of scenarios, including the both secular and non secular changes that happened at be going through these property types. That's our intent.

Jon Gaynor:

That's cool. Let's talk about geography for a minute now. So Canada has been a really bright spot in CMBS. Can you talk to us about what you're seeing in Canadian SASB transactions and why you think they may have been attractive?

Dan Rubock:

Well, Canada is a very specialized market from a legal perspective. We like Canada. They have a very creditor friendly legal environment. Common law based very similar in many ways, to the US. It's included in our US methodology, and we actually give it a benefit for that. That is the one time I will use the word credit positive. Canadian legal system is credit positive, and we give it. A material credit positive boost.

Sam Gilbert:

Okay, well, we finally did it.

Jon Gaynor:

There you go. We got it, guys.

Sam Gilbert:

It's on the record. I know we've seen a number of Canadian SASBs here recently.

Dan Rubock:

Yeah, we've, we've rated, historically, Canadian deals. You know, Canada is a good market and a favorite market, and legally, at least, it gets quite a positive benefit,

Jon Gaynor:

And that's in part because Canada doesn't have the same kind of delays in foreclosure. You said, consistent common law system, so you kind of predictable results.

Dan Rubock:

That's right, not quite like Texas, but not anywhere near like, with all due respect to New York and my Chicago friends like New York and Chicago, So there is a more robust creditor remedy environment.

Sam Gilbert:

Maybe let's shift gears again. Talk a little bit about insurance. I know, which has always been an important topic throughout your career. Maybe give us the lay of the land. Now you know what's happening in the insurance space that should matter to CRE finance professionals, particularly windstorm stuff, right? Like, that's been a big focus these days.

Dan Rubock:

Yeah, yeah. Now, now, Sam, there hasn't been any flashing headlines in the last few months, but definitely there's been trends in the last few years. The insurance market varies from loose to tight, depending on investment returns of the insurance companies catastrophic events and the consequent payouts in a two or three year window, and general climatological outlooks to last year, it was a tight market, as you know, with premiums rocketing, and lately they've abated. So you know, it's a series of back and forth, of pendulum swings. The historic challenge you're absolutely right, has been to for windstorm issues and how to address them. And before 2005 used to get full replacement cost for a hurricane, until the tragedy of Katrina came out, and Katrina put tremendous pressure on insurance companies and on premiums. Borrowers were looking for relief to mitigate the costs, and they said, Wait a second. How about we take an approach that is similar to what we use in earthquake, which is probable maximum loss. You don't necessarily get full replacement costs, but you get to a calculated probability where you feel comfortable getting assurance to that sensitivity, and let's apply that for hurricane. The problem was that PMLs And there were ASTM standards for earthquake for decades before, but nothing for hurricanes. So PML, there were modeling firms, for instance, RMS, which Moody's actually bought a number of years ago, who have very sophisticated models, but you have to be very careful what the output is depending on what the inputs are. And I put out an article back in 2005 or 2006 called is PML, the answer to the hurricane insurance crunch, and my answer back then was maybe, maybe not. Let's see. It may not be ready for prime time, but here are some of the things that might make it credit neutral. And over the years, we did wind up getting comfortable with a PML approach. Now it's very exacting. Our rating scale goes from triple A, double A, A, B, double A. We actually have particular definitions for what that means on a 10 year basis, a, triple A is is under what we call our idealized default rates which are published is one in 10,000 double A is one in 1000 and a is about one in 200 and B, double A, which is our competitors call triple B, is about one in 20. So we were thinking, if you're not going to get full replacement cost, you want to match the idealized default rate, which we base our ratings on, on what the insurance would pay. And so we said, if you're going to give us PML and not full replacement cost, we want that to a one in 10,000 probability. And you know, I did get jokes from some people saying, What are you looking for? Saber tooth tigers and Mastodon stand from the Ice Age. You're going back to the no where it's one in 10,000 and actually, you know, here, in some ways, Orange is the New Black. I mean, you're having 500 year floods become 100 year floods, right? So you're having climatological change as well. So you want to be, you know, one in 10,000 is consistent with our rating scale, and that's what we look for. And that becomes sometimes challenging for some issuers, but for the most part, we've gotten that kind of coverage, and it has relieved some of the pricing pressure to get full replacement cost, we get it calculated just for windstorm in tier one or hurricane sensitive zones, we do expect. Kept solid PML studies, and you could get insurance to that calculated probable maximum loss.

Jon Gaynor:

That was in the weeds, but very helpful. You know, another area that I think you've been a leader on is the terrorism risk. So the, you know, terrorism Risk Insurance Act, or TRIA, was enacted in 2002 it keeps getting extended. I think it's extended through 2027 right now. How do you guys think about terrorism insurance?

Dan Rubock:

You know, my focus on TRIA in 2001 too is where I first got the industry nickname of Disaster Dan. We put out the first piece on the effect of terrorism insurance. We downgraded Rockefeller Center, among you know, many other trophy assets. We got quoted by President Bush. We had meetings set up with the majority and minority leader of the Senate. And I got to be, I know I'm boasting here, but I got to be on a first name basis with Lou Ranieri, Hi Dan. Hi, Lou. Seriously, it was heady stuff. But anyhow, in the early aughts, we didn't know what would happen with with trio, it was partisan, and we weren't quite sure about its renewal. But not anymore. We're highly confident, and on record as such, that trio is going to be renewed. It's a bipartisan issue. Now that expectation is embedded in our ratings. And even so, you know, you know from your loan documents, you have the formula that if Tria ever goes away, which we think is highly unlikely, the borrower has to spend two times on terrorism insurance that they spend on all other insurance. And that was not picked out of the air. That was based on empirical studies where we looked at Bespoke policies that came out during the interim period when interregnum, when you had no backstop and you had no terrorism insurance, you only had like Lloyd's of London, or bespoke policies and for assets, maybe the Empire State Building or something. May have been a an exception, but basically the maximum that we saw was two times the all in insurance price, and so we based that on on what we saw happening before Tria was passed. So we're pretty confident that with Tria expected to be renewed, rolled over as it has been for the last 24 years, and with that embedded provision and loan agreements, we're going to be fine.

Sam Gilbert:

Hopefully the government shutdown will be over before TRIAria comes up for renewal so they can renew it.

Jon Gaynor:

I don't have any flights until the end of April, so I'm really hoping by then, because the security line footage you see where like people are waiting for three hours is terrifying. I don't want to wait a long time. That's why the Acela's nice. You just, you just walk on and there you go. If only there were an Acela to Florida or wherever it is we're going.

Sam Gilbert:

Moving on to asset classes. One emerging asset class over the last few years that everyone's been talking about, obviously, is data centers. There's an interesting question, I think, about whether data center financing is really a CMBS secured by real estate or something closer to, you know, abs backed by technology dependent revenue stream. So how does Moody's, or how does a rating agency think about that distinction?

Dan Rubock:

Well, we have rated data centers for many years, and we recently did come out with an ABS methodology for data centers, depending on the type of structure that the issuer and or the investors prefer. It really, it really. They do use different approaches. One is, you know, an LTV value approach. The other is a cash flow approach. ABS deals are much longer than CMBS deals. They're like 2025 year pay downs. CMBS deals can be five or 10 years at maximum, right? We don't have an issue. Your next question is probably going to be, wait a second, data centers, aren't they just electricity? Isn't that really the basis? Are they really real estate? Well, yeah, they're their real estate and their electricity. But we rate all kinds of things that aren't just pure real estate, but that are anchored in real estate. We rate nursing homes, which are operating businesses. We've rated water parks. We've rated golf courses, I believe marinas, those are operating businesses. And so you know, with real estate as an anchor, CMBS is able to handle that. Our models are robust enough to do that. But when the structure is so different from CMBS, it does have to go to the abs. And in our development of the ABS methodology, you know, we looked at the kind of structures that might be used there and adapted it to the ABS preferences. And we really aimed to minimize any arbitrage between the two approaches.

Jon Gaynor:

And that's interesting too, because the arbitrage between the different asset classes has been like a topic where people are deciding on these structures. So consistency and kind of like a clear sighted view, has got to be helpful for MARKET CLARITY, right? So speaking of data centers, how is Moody's using AI or machine learning to streamline the rating process or analytical work? And is it changing how you evaluate deals or process information?

Dan Rubock:

We are embracing AI with vigor, passion and focus. AI is the future, and you cannot avoid it, and you know, you have to join the club. And we are, I think, a company that is in the forefront of embracing that future. We are looking for agents AI, agents AI, to improve process, to improve efficiency, I think it's going to have a profound effect on how real estate is looked at and analyzed. Being able to handle incredible amounts of data efficiently and swiftly will have tremendous effects on timing and process and cost. I remember when sasbs People said, sasbs can't be less than $400 million or so, and now you have SASB which are like $125 million and part of it was the cost and the efficiency. I think AI is going to have a tremendous effect on timing and cost and process and efficiency and the ability to crunch data.

Sam Gilbert:

Yeah, it's amazing what it can do, and how much in the last six months it's improved.

Jon Gaynor:

Oh, entirely.

Sam Gilbert:

This has been an awesome conversation. I would note, we've gone through the entire thing without talking at all about ground leases, which is surprising.

Dan Rubock:

I'll talk for an hour about them.

Sam Gilbert:

I understand. And a shameless plug I know you and I have a CREFC talk coming up in a couple months on ground leases. So we'll, we'll plug that when it comes and save the the hour long talk

Jon Gaynor:

But send the link to the registration in the show notes, come on.

Sam Gilbert:

Yes, of course. But I guess just to wrap up, if you could change one thing about how CMBS deals are structured today, one provision, one standard, anything like that. What would it be? Obviously, you can't structure deals anymore, but hypothetically speaking,

Dan Rubock:

Well, we exactly. We call balls and strikes. We don't have any desires in any way. And we are the Swiss of of the financial world in a sense.

Jon Gaynor:

Dan, thanks so much for joining us today on this episode of the Dechert 4 real podcast. It's been a real pleasure.

Sam Gilbert:

All right, been great having you back at Dechert for a little bit.

Dan Rubock:

Again, a real pleasure.

Jon Gaynor:

Thank you for joining us for another episode of the podcast. If you have any thoughts, please share them with us at our email inbox, realpodcast@dechert.com Also, if you like what you heard, give us a five star rating on whatever platform that you found this on, and maybe tell us your best baseball analogy. This episode was hosted by Sam Gilbert and me, Jon Gaynor, Stewart McQueen, Matt Armstrong and Kate Mylod produced it. Production support is by Kara Ray, Mallory Gorham, Alyssa Norton, Peggy Heffner, James Wortman and Jacob Kimmel. Our editor is Andy Robbins of Audio File Solutions. Thanks for listening, and we'll see you next time on the Dechert 4 Real podcast.

Sam Gilbert:

All right, let's hear some quick dad jokes. Dan, you have any?

Dan Rubock:

My, my kids accuse me of having too many or only dad jokes, or only dad jokes? I think they're better than dad jokes, but I guess they're dad jokes, but the one dad joke that I have is my daughter got me a calendar with 365 dad jokes every day, a dad joke. And the one that my favorite, that I actually peeled off and have on my home office is, what did Batman say to Robin before they got in the car?

Jon Gaynor:

What did Batman say to Robin before they got in the car

Dan Rubock:

Get in the car. Okay, that's my dad joke.

Sam Gilbert:

That's a good one.

Dan Rubock:

Yeah, I'll take it.

Jon Gaynor:

You're not doing a good pitch for the calendar, though. So I have one. So we had a baseball theme, right? So why was the stadium so cool?

Dan Rubock:

Why?

Jon Gaynor:

It was full of fans.

Dan Rubock:

Oh, all right.

Sam Gilbert:

I'll get a baseball one here for you too. Why was the baseball player a great musician?

Dan Rubock:

Why?

Sam Gilbert:

He had perfect pitch. And why was the baseball player always invited to parties?

Dan Rubock:

I give up.

Sam Gilbert:

Because he was a real hit. I could keep going, but I don't think...

Jon Gaynor:

I don't think we shouldn't torture our guests.

Dan Rubock:

Yes.

Jon Gaynor:

I'm glad you got the groaners this time, Sam.