Basic Question on Special Servicing. Who Drives the Ship?
Apologies for the basic question. I’ve identified a number of deals that are in special servicing, and want to reach out to key decision makers on a possible sale. Who drives the ship/process here? I think it’s the special servicer but not sure if it’s the senior? Thanks in advance
In the context of special servicing, the key decision makers are typically the special servicers. They are responsible for managing the process and making decisions regarding the sale of assets. If you are looking to reach out about a possible sale, the special servicer would be the appropriate point of contact.
For more detailed discussions and insights, you might want to check out the relevant threads on Wall Street Oasis, such as the one titled "Buying REO from Special Servicers."
Sources: SENIOR BANKERS: Whale hunting vs. volume work at the senior level, https://www.wallstreetoasis.com/forum/trading/qa-senior-financial-services-executive-fixed-income-equities?customgpt=1, Q&A - Commercial Banking Credit Risk SVP in Southeast USA, "We don't hire VPs", Lazard v. Morgan Stanley Post-MBA
I hope you mean a note sale at or close to par prior to a F/C and not trying to convince a special to sell you a REO property for 20-30% of the prior debt like you’re doing them a solid.
DCH (if there is one) drives the bus if they haven’t been appraised out of control, and SS takes action on the resolution strategy. For non-DCH deals, SS will determine the path forward for the asset.
When they are ready to sell, they likely want to broadly market the deal to show they have achieved the highest return to bondholders with the final offer selected. There are exceptions but rare.
What is DCH?
Literally the Directing certificateholder, they are first loss position bondholder, controlling class, etc. etc.
Everything I’ve heard and read is the special servicer is paid more the longer they’re managing the loan, and behaves accordingly.
The deal would go to special and they would be in control on behalf of the bondholders. Bondholders have differing levels of rights depending on the deal and their risk. As Tranche mentioned, if there's a DCH, they're driving
As Tranche also mentioned, do not think any level of proactivity gets you ahead ESPECIALLY if you are approaching thinking you could buy below par. Their job is to maximize the pie that's returned to bondholders. I really don't have much understanding on what all goes on but I imagine it's essentially a group of creditors working to ensure they at least get theirs back on a company that goes belly up. Even if you could somehow land a sweetheart deal, I'm not sure you'd want to go through with it if its accompanied by legal implications or introductions to fairly agitated bondholders should it be successful.
It seems like you could reach out though to work to ensure your group is thought of when/if they run a sale process. Very interested in anyone else's experience or input on this post
We buy a lot of deals from the special. Special facilitates the conversation, B piece is first loss so they drive the decisions. Unless you can sweet talk an A/B note you are paying par and often times have to participate in a marketed process.
I know way more about this than I reasonably should due to the events of these past two years. We are the b-piece holder in a Freddie Mac K-series trust, and we have driven the bus on several loan resolutions during the past two years. Our actions are carried out by the special servicer assigned by the trust, and both our authority and the special's authority is set forth in a 500-page document called a pooling and servicing agreement. The pooling and servicing also sets forth the fees earned by the servicers.
To the person above who said that the special servicer gets paid by how long the deal is in SS and acts accordingly, that jives with our experience working with one SS. We actually terminated that SS on behalf of the trust (DCH can typically do that) and brought in a new servicer who has been fantastic. So the b-piece holder definitely has ultimate control subject to the framework of the pooling and servicing.
To resolve a defaulted loan, a DCH can do a bunch of different things - buy the note out of the trust and foreclose separately, acquire the property and assume the loan via a receiver sale (which we elected to do), direct the SS to sell the property, among many other things. Generally, the fees are typically minimized by buying the note out of the trust and foreclosing directly, but we wanted the debt because it was sub 5% all-in and fixed, not to mention that a special servicer is typically going to be very, very forgiving with any requested loan mods if you're coming in as a white knight and making an event of default go away. However, you lose your DCH status on those certain loans when assuming and modifying, and control in the event of default is ceded to the next sequential certificateholder. Because if not, there would be a huge conflict of interest in event of default.
A Freddie K deal is just one example out of many, but once you understand these structures, they become somewhat intuitive. But it definitely took me a while to get comfortable with how this works.
Great read, thank you for sharing all that.
Super interesting on DCH removing a SS that’s impeding the process. I can easily see how that’d be a better outcome but curious how practical the process of actually doing it is
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