CRE Workouts: Early Signs Of Banks Implementing the 'Good' Note A and 'Bad' Note B Approach?
Previously, we commented on the October 30, 2009 regulatory announcement by Federal regulators, which articulated a significant switch or approach in the handling of distressed commercial mortgage loans. [links to two blog postings, including a copy of the announcement]
One startling portion of the announcement is that banks are encouraged, in the appropriate circumstances, to split the distressed note into two notes: a performing Note A; and a non-performing Note B.
The bottom line question is this: so what? Is this approach being implemented at banks and then approved by the regulators?
I’m having a “conflicted” experience on this question:
- On Wednesday, April 28, I attended the spring meeting of the Real Estate Finance & Investment Council of the McCombs School of Business at the University of Texas at Austin. One speaker gave this answer: “my company is seeing thousands of these Note A\Note B loan restructures, all based upon the October 30 announcement.”
- This falls in line with a statement (heard by me) by the Chair of the FDIC at a conference earlier this year: “we’re bringing in our examiners and telling them to support Note A\Note B structures in commercial mortgage loan workouts”
- Wow; this is not my experience. I’m seeing ZERO regional and community banks implementing this Note A\Note B structure in workouts – despite the October 30 announcement and the statement by the FDIC Chair. In contrast to all of that, I have attended conferences and lunches where bankers literally confront local regulators about their refusal to implement Note A\Note B structures. Yes, those conversations have been “uncomfortable.”
After the speaker left the stage, I asked him (out of earshot of others – he’s a friend and well-respected by others): “Who is doing the Note A\Note B workout? Are you out of your mind?”
He named a top 5 bank, and commented that his company recently worked on 3 workouts involving this structure.
He agreed with me: so far, his company has NOT seen the structure at the regional or community bank level.
However, his comment points to this:
- with the big banks starting to implement the A\B note structure, in time the approach will trickle down to all banks
- this is a good thing: the A\B approach will unlock the debt stack, and will be the key to allow the market to find solutions to injecting new capital
QUESTIONS: what are you seeing on this topic? Do you agree with my thoughts?
Please post your comment or question below.
