MF lenders selling notes below par
Rumor has it that Arbor, MF1 and the obvious suspects have started marketing their worst performing notes at rates below par. I heard a couple numbers low they beggared belief (except for how atrocious the properties are).
Is this typical rumor mill BS or are the syndicator lenders finally trying to take cash off the table before they lose more?
Think I replied to you on the Bingo forum. I haven't seen anything yet especially from the CLO guys, which the syndicators hung on to. Arbor and MF1 are holding tight to chest, but should be letting things go.
I think the consensus with most lenders is no their is no need to take small losses, i.e 90-95% of par sale. Either hold until you get paid back or can sell at par, or forced to sell at last possible minute at 70%. Most of the lenders think like sheep, they don't like to be the first to sell until everyone else has started to let go, and look foolish taking a small loss; even if that means they are saving themselves from a huge loss in the future, because they'll at least be with company and mitigate any of that headline risk. They $ amount and loss doesn't scare them too much because most of this is packaged away and sold off to investors, and can always point back to the fact that it was "the market" even if it was them being careless and chasing fees, so they can survive another day. With these lenders it's a lot of optics versus actual responsibility to their investors.
Think the first wave of groups to get hit are definitely MF1, Acres, Arbor, Argentic, BSP, Mack, and Readycap, these are the groups that were the most aggressive over the past few years. Maybe Newpoint, but haven't heard to much about them, just their relationship with Meridian. These guys I see as being the early sellers of subpar notes, and most of these notes should've been sold for a discount way before. The collateral is probably worth 70-80% of the note. You'll have groups like Starwood and Rialto, just cleaning up shop also.
Would be happy to hear differently though, and also could imagine some of the notes being sold quietly off to relationships that offer future business to the lenders, where the lender also gets to save face and backend economics to those groups.
Thorough and informative. Thanks. Agree that there are some sales happening quietly at great discount in exchange for high intangible value.
For the more publicly known situations, at what point does lender realize it has to sell at an excessive discount because they waited too late? When the borrower blows the mod terms twice? When the DSCR drops even further than the .60x were already seeing?
Also in regards to crumby modifications, below is commentary from Morningstar regarding MF1s recent mods to Tides regarding MF1 2020 FL4 issuance. This is starting to become common practice across the board with lenders and their borrowers with the most exposure. These should've been sales at 70% of par:
The three remaining loans in special servicing are sponsored by Tides Equities (Tides), including Maravilla Apartments, ($45.5 million, 6.5% of the pool), Palm Valley ($28.4 million, 4.1% of the pool), and Superstition Vista ($14.7 million, 2.1% of the pool). The loans transferred to special servicing in August 2023 due to imminent monetary default as the sponsor experienced performance issues across its commercial real estate portfolio. The loans were modified in October 2023, requiring the borrower to make deposits into various reserves including accounts payable reserves, interest reserves and interest rate cap reserves. The interest reserves also have a replenishment requirement, which is a sponsor guaranty under each loan. In return for these deposits, the lender will allow the borrower to defer a portion of each loan’s monthly interest rate payment of up to 50.0% of the loan’s contractual interest rate margin during the first 12 months and up to 25.0% of the margin rate for the following 12 months. Any deferred amounts will be capitalized and added to the respective outstanding loan balance. Additionally, the debt yield property performance tests to qualify for loan extension options were removed, and the related loan extension fees were waived. In its analysis, DBRS Morningstar increased the probability of default across all three loans, which resulted in individual loan expected loss figures of approximately two times the expected loss for the overall pool.
Those three loans represent 12.7% of the entire pool, how morningstar didn't downgrade is another story, but it goes to show you that these lenders will do anything to keep loans in the trust for as long as possible before selling below par, even if that gives additional risk to the entire securitization. Also they are incentivized to send them to special servicing and keep them there so everyone gets paid more servicing fees.
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