Into the Looking Glass: MBA Servicing & Technology Conference - day two
Yesterday (Thursday) was the second, and my last, day of the conference. As I did with the first day of the conference, I summarize some of the sessions. So, here's the executive summary:
From a session on bankruptcy issues:
- as reported by the Commercial Mortgage Securities Ass'n in its press release, the bankruptcy court in the General Growth Property bankruptcy issued a good ruling on Wednesday. The ruling recognized the integrity of the special purpose vehicle (or single purpose entity; also called "SPE") utilized by GGP in the ownership of each mall in its portfolio. (Recall that many GPP malls are owned by a SPE subsidiary of GGP.)
- for detail on the importance of the SPE structure to the commercial mortgage lending industry, and for an understanding of the structure itself, take a look at the brief filed by the CMSA in the case.
- briefly, the debtor-in-possession financing recognized the validity of the SPE structure: it did NOT place a lien on each mall (which are owned by separate SPEs) and the first-lien holders of each SPE-owned mall were given a first-priority lien on the cash collateral from their mall collateral
- next step of interest in the case: the hearing on the bad faith filing issues. Was it proper for the solvent SPE to be included in the bankruptcy of the parent GGP?
From a session on the challenges in complex transaction structures:
- one of the first tasks in handling a distressed loan is identifying the parties and their issues. For example: (1) who\what are the creditor & borrower issues? (2) who\what are the co-lender issues? (3) and if there is a separate servicer, what are the terms of the servicing agreement? The answers: find the documents. Read the documents.
- the many, varied structures of the credit stack present challenges simply in understanding the relationships between all of these parties. Here is a short list of common structures: 1st lien & mezzanine debt (with one or more mezz debt positions; and each mezz debt could have all of the following structures); A note and B note (and the A note might be securitized); A1, A2 and A3 note (and the A1 note might be securitized); "true" participations of any of these notes (if not securitized); etc. Some of these credit stack structures will give you a head ache. And often the borrower has NO knowledge of them - although a sophisticated borrower might recognize some of the clues pointing to a complicated credit stack.
- for credit stacks that include securitized debt, the rating agency faces multiple challenges: (1) post-closing surveillance (in that it often does not have access to loan documents covering discrete loans in the credit stack); (2) issuing confirmation letters ("no down-grade letters") can be problematic for the same reason; (3) intercreditor agreements and loan documents might not comply with rating agency requirements
- special servicers in securitized loan pools are being changed by the controlling class holders and the B note holders. This can result in two different special servicers: one appointed by the controlling class holders for the entire pool; and a second by the B note holder as to the notes that it has first-risk loss. Another complication, of course, is that the special servicer must be approved by the applicable rating agency. And to further complicate it all, often the intercreditor agreement(s) have a higher rating standard than the standard required by the rating agency monitoring the pool.
- some of the credit stacks are so complicated, that it is difficult for the servicer to determine "who" should receive notice of a change in servicing (or "who" should receive any other notice). One answer is to follow the money: if the master servicer is the paying agent for the pool, the servicer's treasury group has contact information.
- against this complicated back drop, borrower's often communicate to the incorrect lender! And have difficulty in indentifying "who is who" among this confusing group of players.
- in a prior posting, we commented on the question of whether a borrower should intentionally default a loan that has been put in a securitized pool. The panel noted these dire consequences for a borrower in special servicing: (1) default interest will accrue; (2) late fees will accrue; and (3) workout land is NOT "borrower friendly" - and if borrower does not obtain its desired result, there is no "free pass" back to the safety of master servicing.
- for loans with "springing" lock box features: borrowers are refusing to do the paper work to create lock boxes. This results in a covenant default under the loan, which triggers a transfer of the loan to special servicing. Also, on several loans, local banks (who have long-standing relationships to the principal behind the borrower) have closed dormant, "springing" lock box deposit account - which is a real problem when the lockbox "comes to life" and the master servicer attempts to implement the lockbox structure.
From a session on loan surveillance:
- each point of the mortgage compass is requiring more and better information: bond holders, rating agencies, federal and state regulators, investment committees, etc.
- loans are being reviewed more often (even monthly)
- all of this is a major difference from the late '80s & early '90s
- what are some of the warning signs of a loan going "bad"? (1) exhausting a debt service reserve (recall: this type of reserve was used when a project was not stabilized); (2) exhausting a contingency line item (in a construction loan); (3) change in ownership of any portion of the credit stack (this is often difficult to monitor); (4) low utilization\occupancy of space by tenants; and (5) ___________
- surveillance needs to have a "forward" looking component, such as: (1) future lease rollover; (2) local market information and trends (new construction of competing projects; tenants looking for space; etc.); (3) sponsor level debt information (amount; maturities; etc.); (4) free rent and rental rate trends in the market; and (5) _________
- use "free" resources available on-line
- one problem for servicers: each lender seems to have their own, unique reporting form
- one lesson in this "new" economy: real estate really is unique. Thus, people need to understand and evaluate each tenant, project, market and principal.
- one panelist briefly mentioned the all-important "mortgage experience adjustment factor" - which is a risk-based capital concept governing insurance companies who hold commercial mortgage debt. Some time in the near future we'll blog on that mind-boggling concept - and the draconian effect that it has upon insurance companies and their mortgage portfolios. It is horrible.
This is my last posting on the conference. It met my expectations. Everyone agreed: it was the "best" servicing conference in years - undoubtedly because this is the worse real estate market in years.
Today it is back to the office, and the nitty-gritty of workout world.
Please post your comments, suggestions or questions below.
P.S.: back to the restaurant review thing - although there are "cooler" places to go in New Orleans, if you stay at the Hilton Riverside (the conference hotel), then you're immediately adjacent to the Riverwalk Marketplace mall. The Crazy Lobster (504.569.3380) is a free-standing bar and restaurant on the Riverwalk. It is a good place to catch a breeze and a change of pace. Like many places in NO, it has live entertainment in the evenings. We escaped the conference for several lunches at the Crazy Lobster. It is a short (100 yards?) walk from the Hilton. (And yes, it is a GPP mall - and probably owned by an SPE.) (See discussion above on GPP and SPEs.)
