Bulk Special Servicer Liquidations Raise Questions

CRE Finance World, Winter 2014

Bulk Special Servicer Liquidations Raise Questions spate of liquidations of large pools of distressed loans is leading some market players to raise questions about the methods used by CMBS special servicers. The questions revolve around whether bulk sales are the best way to produce the highest proceeds for each individual loan in a trust and whether special servicers have a responsibility to publicly disclose the identity of each property in the pool. The issues came up at CREFC’s Oct. 24 After-Work Seminar, “Loan Mods, Liquidations and Workouts: A View From the Trenches,” which was moderated by Citigroup’s Jeff Berenbaum. Discussion centered around CWCapital’s $2.6 billion sale of specially serviced assets, which was announced two weeks before the seminar. The deal encompassed 8.9 million square feet (sf) of office space, 3.2 million sf of retail and 2,129 hotel rooms. Bidding was ongoing as of mid-December. CWCapital’s sale was one of several bulk liquidations to come to market in recent months, as special servicers are trying to take advantage of the red-hot transactions market. In addition to the $2.6 billion sale that was offered via CBRE and Auction.com, CWCapital was also marketing another $665 million portfolio through Auction.com. During the summer, Orix Capital Markets disposed of more than $1 billion of specially serviced loans through CBRE and Mission Capital Advisors. Demand for US commercial properties is exceptionally strong among a wide array of investors, such as private opportunity funds and foreign investors, that are looking for stability and income returns. The NCREIF Property Index has produced double-digit total returns for three years in a row as capitalization rates of core properties have dropped to historical lows. That has led a growing number of investors that want higher yields to look for more opportunistic acquisitions such as distressed loan sales. Unlike other bulk auctions, CWCapital didn’t publicly disclose the list of properties in its $2.6 billion sale, a decision that drew criticism from some investors. The property list was available to investors who signed confidentiality agreements, but some pointed out the Catch-22 situation created, whereby if they signed to get non-public information, their ability to trade the bonds would be restricted. As a result, for a time, different investors had different levels of information about securities that were traded. CRE Finance World Winter 2014 36 Some investors said the situation led to a slowdown in all CMBS trading for a short time, as many were reluctant to trade any deal without knowing whether some of the loans in the pool were part of the bulk sale. Eventually, several CMBS research teams pieced together the assets in the pool and published a list, but “the market ground to a halt for a week or two because some investors were reluctant to take down (senior triple-A bonds),” as one trader put it. Speaking during the After-Work Seminar, a hedge-fund investor said the lack of disclosure set a bad precedent and set the process off to a bad start. “If it keeps happening, people won’t sit idly by and see their interest in the deal damaged,” he said. “There will be pushback.” CWCapital representatives have said that they didn’t publicly announce the identity of the properties because they didn’t want a large number of potential bidders visiting the properties and disrupting the operations. Also raised at the seminar was the issue of whether special servicers leave money on the table by selling so many assets at once. Since special servicers have a fiduciary obligation to seek the best execution for the trust for each loan, some questioned whether it is possible that the best timing is the same for dozens or more of loans sold in bulk. CWCapital is accepting bids for the individual assets as well as pools, which could help to optimize proceeds. Andy Hundertmark, a CWCapital managing director who was a panelist at the seminar, said the question about execution won’t ultimately be answered until the sale is complete. However, he cited the current market as an excellent time to sell assets, noting the large amount of buyers looking for properties, low interest rates and high property values. What’s more, the competition from the mass of institutional buyers looking to put large chunks of money to work should help drive up prices for bulk sales. “Based on the number of confidentiality agreements we’re seeing, the base of investors is deep and wide,” Hundertmark said. Yet another question is whether bulk sales produce a windfall for junior bondholders as interest shortfalls are paid back before those classes are liquidated. Special servicers don’t explain why some properties are included in a sale as opposed to others, giving rise to concern from senior investors that the specials are acting to maximize servicing fees rather than proceeds. A Paul Fiorilla Co-Managing Editor CRE Finance World


CRE Finance World, Winter 2014
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