Here is an article (subscription required unless you email it to yourself) from today's Wall Street Journal on the CMBS market. Commercial mortgage default rates, defined as more than 60 days past due, for mortgages in CMBS are now at 7%, and are expected to reach 11% by year-end. This article confirms what I have been hearing, in that special servicers, the firms tasked with handling defaulted mortgages, are getting more creative in restructuring mortgages. Until recently, the special servicers only real options were to extend a mortgage for a short period or give a break on interest rates, as their sole goal was to protect CMBS investors from losses. This task is getting untenable as the scale of defaults and pending maturities are changing CMBS dynamics. Here is a long quote from the article:
Servicers have restructured about $13.7 billion of those loans, according to estimates by analysts at Deutsche Bank. Such restructurings, which include extending loan maturities and reducing interest rates, could help bondholders and borrowers avoid bigger losses as the economy recovers. But some borrowers still wind up defaulting.It is my opinion that this new flexibility will help the real estate market. I suspect it will also spur more commercial mortgage refinancings, which will also help the real estate market.
Such firms—including LNR Property Corp., owned by private-equity firm Cerberus Capital Management LP, and CW Capital, majority-owned by Canadian pension manager Caisse de Dépôt et Placement du Québec—are "going to trot out the entire playbook" used during the real-estate crash of the early 1990s, said Mark Warner, a managing director at BlackRock Inc.
One emerging restructuring strategy involves cutting mortgages into good and bad pieces. For example, Grossman Company Properties was in danger about a year ago of defaulting on the $190 million mortgage for its Arizona Grand Resort in Phoenix, which is suffering from a decline in business and leisure travel.
The loan, originated by Greenwich Capital, was part of the Goldman/Greenwich deal in 2006, which also includes troubled loans on an office complex in downtown Los Angels and six retail stores. Grossman is led by real-estate investor Sam Grossman, who made a name for himself by snapping up distressed assets in the early 1990s. After months of negotiations with CW Capital, Mr. Grossman's company struck a deal allowing it to keep the property in return for a $5.8 million capital infusion.
The original Grossman loan was split into two parts, with the cash flow from the 640-room resort, equipped with two golf courses and a water park, now used only to service the debt on the $100 million part of the loan, Deutsche Bank said. The second slice, totaling $90 million, will get no payments until the loan matures in 2016 and the first part of the loan gets paid off.
The net effect of this restructuring is that it allows the subordinate bondholders to avoid taking a loss before the loan matures while delaying the recoveries for senior bondholders, Deutsche Bank analysts note. Supporters of the restructuring said the move was in the best interest of all bondholders and the borrower because liquidating the property likely would have resulted in large losses.