CMBS Loan Restructures: Reach the Summit!

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Ann hambly, CMBS Loan Restructures: Reach the Summit!

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CMBS Loan Restructures: Reach the Summit!

  1. 1. CMBS Loan Restructures: Reach the Summit! ULI Spring Meeting May 8-10, 2012 Charlotte, NC
  2. 2. Market Overview Outstanding real estate loans = $2.9 trillion Banks: 59% CMBS: 21% Insurance companies: 8% Other: 12% 2
  3. 3. CMBS Loans in Special Servicing 3
  4. 4. Defaults by Year of Origination 50% 40% 30% % by Balance 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 84% 4
  5. 5. How Did We Get Here? • AAA represented 70% of the first  • AAA represented 90% of the first  mortgage mortgage • No I/O loans • Mostly I/O loans • Reserves, lock‐box, lender  • Little lender protection protection • 2007 CMBS issuance: $230B • 1995 CMBS issuance: $14B 5
  6. 6. Parties 6
  7. 7. Who Are The Special Servicers? Rank Company Amount  ($millions) 1 LNR Partners, Inc (U.S.) $192,304 2 CWCapital LLC & CWCapital Asset Mgmt. $158,949 85% 3 C‐III Asset Management LLC $112,238 4 PNC Real Estate/Midland Loan Services $62,953 5 Berkadia Commercial Mortgage LLC $28,176 6 Torchlight Loan Services $26,000 7 Wells Fargo $25,016 8 Bank of America Merrill Lynch $16,755 9 KeyBank Real Estate Capital $13,400 10 ORIX Capital Markets, LLC $7,497 7
  8. 8. Who Owns Them?Top Three Special Servicers:• LNR – Recapitalized by a group of five opportunistic buyers (Vornado Realty Trust, Cerberus, Oaktree, iStar Financial and Aozora Bank) – $27.1 billion in UPB of loans in Special Servicing• CW Capital – Bought by Fortress Investment Group – $20.2 billion in UPB of loans in Special Servicing• C-III – Formerly Centerline, bought by Island Capital, and changed name to C-III – Island Capital also acquired JE Robert’s Servicing platform recently – $16.1 billion in UPB of loans in Special Servicing 8
  9. 9. Servicing Standard• Special Servicer Servicing Standard – Maximize return to all bondholders without regard to your own position and no benefit of 20/20 hindsight. 9
  10. 10. How Losses Affect Special Servicers• Current CCR appoints special servicer• Losses hit lowest tranches of bonds first• As losses wipe out a class of bondholder, CCR charges EXAMPLE ($100 pool) Original Face  Losses Current  Amt of Bond Bond Amt AAA 50 – 50 AA 20 – 20 A 10 5 5 (CCR) BBB 10 10 0 B 6 6 0 UR 4(CCR) 4 0 10
  11. 11. Shares of Bonds Taking Interest Shortfalls 120% 100% 80% C-III 60% CWCap LNR 40% 20% 0% AA A BBB Below BBB 11
  12. 12. CMBS Maturities• There are massive scheduled loan maturities coming due that will need to be refinanced. In the next 5 years the total amount is estimated to be $1.7 Trillion. 400 350 71.2 72 300 68.5 58.5 23.2 24.1 23.2 22.1 50.5 43.4 250 62.4 53.8 21.4 20.2 66.8 200 101.8 150 110.9 138.8 100 213.1 209.2 183.1 150.6 50 106.4 79.2 0 2012 2013 2014 2015 2016 2017 Banks CMBS Life Companies Others Source: Foresight Analytics 12
  13. 13. Most Maturing Mortgages are Under Water % of Maturing Commercial Mortgages Under Water 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012 2013 2014 2015 13
  14. 14. Restructure Types 2010-June 2011 $63.5 Billion Resolved from Jan. 2010‐June 2011 Modified: 39% Reinstated by Borrower: 16% DPO: 15% Paid in Full: 12% Foreclosure/REO: 9% Note Sales: 9% $82 billion has been resolved since 2007 14
  15. 15. What Does It Take to Get One Done?• New capital• Know the special servicer’s “rulebook,” drivers and motivations• Present a well thought-out plan in writing• Be patient• Be transparent• Understand the special servicer’s options• NPV 15
  16. 16. NPV• In PSA• NPV is calculated for all options CURRENT APPRAISED VALUE OF PROPERTY – Hold Costs • Carry Costs (varies greatly • Advancing by state) – Foreclosure & Legal Costs – Selling & Disposal Costs – TI, LC – Property Taxes, Insurance NET IS THEN PRESENT VALUED USING DISCOUNT RATE• Decision is driven off of highest NPV 16
  17. 17. Location! Location! 17
  18. 18. Primary Considerations in Restructure• Is property under water today? – If NO = Payment modification – If YES = Will it likely recover most or all of its value by maturity? • If NO = Debt forgiveness OR DPO OR note Sale • If YES = Debt deferral OR A/B structure OR A/B/C structure• Know your ultimate exit strategy• Know your menu of options – Not all A/B structures are the same• Hire a sherpa• Know the ultimate decision-maker – CCR – CCR life expectancy – How will a change affect the outcome? 18

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