Posted on Wednesday, September 15, 2010
The secondary market for new commercial mortgage-backed securities (CMBS) went dark after the real estate downturn sent property values plummeting and defaults soaring.
Investor losses have piled up from old CMBS deals and there’s still more to come. Two different ratings agencies both reported last week that the delinquency rate on loans included in commercial mortgage bonds jumped well above 8 percent in August. With distress still mounting, new deals have been hard to find.
In 2009, total CMBS issuance came to just around $3 billion, compared with $230 billion in 2007. Secondary market players are anticipating only about $10 billion of new deals this year.
The deals may be few and far between, but those maidens that have made it to market have met with strong interest from investors – investors with an appetite for high risk and high yield.
JPMorgan Chase’s latest deal – a commercial mortgage bond backed by debt from the Australian real estate developer Centro Properties Group, collateralized by 72 retail shopping centers in 20 U.S. states – sold in early September for $484.6 million.
JPMorgan was able to secure buyers despite the fact that just two days before the sale, Centro warned that its debt load was “unsustainable,” according to the Wall Street Journal, and one month prior, Fitch Ratings cut its issuer
rating on Centro’s parent company to the level just above default.
JPMorgan agreed to a higher interest rate, curbed its borrowing amount to just 55.5 percent of the asset value of the top-rated tranche of the deal, and threw in an added incentive of giving bondholders the power to appoint their own independent directors in the event Centro were to fall into bankruptcy.
Other investor “perks” are also making their way into the transactions. JPMorgan unloaded a $660 million CMBS offering in August. It was backed by retail properties in the northeastern United States, all owned by Vornado Realty Trust. To sweeten the sale, JPMorgan gave the senior investors in the highest-rated, least-riskiest part of the transaction the authority to select and manage special servicers for loans that go bad.
Typically, it’s been the holders of the riskier junior pieces of the bond that have been given the power over troubled loans, who because of their position usually have a greater interest in finding a way to maintain the debt rather than foreclose. Conflicting motivations can give rise to a tug-of-war between senior and junior bondholders, and in the more recent deals, investors have been insisting on a better alignment of interests among the parties involved.
Because of this concern that holders of the riskiest slices of the debt might make decisions that favored only their interests, Goldman Sachs and Citigroup also gave authority over special servicing to investors of the highest-rated tranches of their $788 million CMBS issuance in early August.
In the new-era of CMBS, investors are also demanding additional disclosures on the collateral pools backing the debt, new technologies that allow participants to communicate with one another and obtain servicing reports, and limits on the fees special servicers can charge for handling delinquent loans.
Some deals are also incorporating extra bondholder protections against losses and interruptions to principal and interest payments.DSNews.com