Climbing obstacles for passage of CMBS relief bill

A bipartisan congressional bill introduced last month that would benefit struggling CMBS borrowers through a new loan facility backed by the Treasury went to the House Financial Services Committee for consideration.

But the transition could be an uphill battle, based on a negative reaction to the measure. Even an influential pioneer in the commercial mortgage-backed securities market has called the measure a bailout for developers and investors with deep pockets, which is “bogus, outright.”

“CMBS borrowers are corporations or high net worth individuals who should have known better and who took risks for which they now have to pay,” wrote Ethan Penner, co-founder and managing partner of New York-based Mosaic Real Estate Investors. . August 6 online commentary on the Medium site. “These companies should be allowed to go bankrupt.”

Penner, a former Nomura Securities financier who as the “father of CMBS” helped develop the commercial real estate loan securitization market in the 1990s, voiced the kind of criticism that securitized credit analysts from Barclays had predicted shortly after the July 29 introduction of HOPE. (Help Open Endeavo properties ”) Take action.

“[D]Despite bipartisan support, we believe there are various obstacles to the passage of this bill, the most important of which is that it will likely be seen as bailing out wealthy homeowners, ”according to a securitized credit research note from Barclays. July 31.

The HOPE Act is co-sponsored by three lawmakers – Representatives Van Taylor, R-Texas, Al Lawson, D-Fla., And Andy Barr, R-Ky. – who warned of a growing wave of defaults, foreclosures and further job losses in the hospitality and retail sectors if CMBS debtors cannot meet their payments for the service of the debt. CMBS defaults in May topped 10% for the first time in eight years, and borrowers have little flexibility through lenders or services to manage their sharp drop in income due to business closures related to the Bank. coronavirus.

The bill would allow the U.S. Treasury to purchase preferred stock investments in CMBS loans, using funds from the Coronavirus Aid, Relief and Economic Security (CARES) Act.

But as lawmakers discuss the threat to the livelihoods of CMBS borrowers, large investment firms will also be among the primary beneficiaries of The legislation. They include Tom Barrack’s Colony Capital (NYSE: CLNY) and Ashford Hospitality Trust Inc., according to Bloomberg News.

Barrack, executive chairman of Colony, was a strong supporter of government-backed CMBS lightening end of March at the start of the coronavirus pandemic. (In May, Colony would have been lacking on $ 3.2 billion in loans in its portfolio of more than 150 hotels and healthcare facilities.)

Meanwhile, the chief financial officer of Ashford Hospitality (NYSE: AHT), a Dallas-based hospitality-centric real estate investment trust, said on an earnings conference call in early August that he expected the invoice to be “a big help for usAs its valuation fell 80% this spring, AHT’s search for new funds included granting a $ 68 million loan from the Small Business Paycheck Protection Program. first insisted that he kept the money when his loan made headlines in May, before agreeing to return the product to the Treasury.

Ethan Penner, Founder / Managing Partner, Mosaic Real Estate Investors

Mosaic real estate investors

Under the HOPE Act, borrowers, including REITS, private equity promoters and property management companies, would have access to the new Treasury facility, which would provide guaranteed bank financing (at 2.5% d ‘interest) up to 10% of the outstanding balance on a mortgage loan (some of which exceeds $ 1 billion). HOPE loans would only be available to borrowers whose properties have experienced a 25% drop in property value since March 1, had a debt-to-service coverage ratio of at least 1.3 times in 2019 (or in 2017 and 2018), and would not be in default.

Any default by the borrower must also have occurred after March 1.

Supporters are touting the HOPE Act as a way to avoid foreclosures of commercial real estate hit hard by the COVID-19 fallout, including housing and retail businesses. Commercial borrowers have not only experienced a decline in income, but are unable to secure bridging or emergency funding under CMBS loan agreements prohibiting other debt securities. Many hotel properties, for example, have had to negotiate with lenders to fund debt payments from reserve funds typically used for property development and maintenance, according to an Aug. 3 report from Moody’s Analytics.

It’s unbearable, Barclays CMBS strategist Anuj Jain said in an interview.

“Despite the [revenue] improving from the April lows, most hotels are still not able to break even or have positive cash flow, based on recent accommodation REIT revenues, ”Jain said . “It is possible that the reserves are so high that you can keep going through it, but others, I think you can justify the need for some kind of relief.”

Barclays estimated in its report that the HOPE Act would likely cover a large majority of non-agency CMBS loan portfolios, which are dominated by lending to the hospitality and retail sector, of which “almost all will satisfy” the demand for a drop in income by a quarter.

The level of unpaid CRE credits and special service assignments on the whole is increasing, particularly in accommodation and commerce. Trepp’s research data shows that July’s CMBS special service rate jumped to 9.49% from 8.28% in June. Within the accommodation sector, special services reached 24.3% of all loans in July, up from 20.47% the previous month. For loans to individuals within CMBS portfolios, it rose to 16.04% last month from 14.24% in June.

So far, the CMBS market has not greatly benefited from the trillions of dollars that the Treasury Department and Federal Reserve have pumped into the economy. Bonds issued from CMBS transactions, for example, have been excluded from the $ 100 billion asset-backed securities lending facility (TALF) which provides discount funding for AAA-rated notes of other classes of securities. structured financing like auto, student and credit cards. loans as well as secured loan obligations.

In his commentary, Penner argues that CMBS borrowers shouldn’t be helped by taxpayer support in the first place. He notes that CMBS loans often include lucrative cash payments for homeowners or to leverage large acquisitions.

“Borrowing from the CMBS system has become a forum for most greedy and risk-seekers, or ignorant, none of whom deserve a bailout,” Penner wrote. “Commercial real estate is a game for professionals and government aid should be reserved for those segments of our society that really need it.

The Barclays report said not only could the bill attract resentment from opponents of the bailout, but subsidizing loans in some long-standing CRE hot spots might not be a wise investment for the government, like shopping centers “which are in long-term secular decline”.

Barclays also noted that since “this bill is not part of the recently introduced HEROES project [Health and Economic Recovery Omnibus Emergency Solutions] or CURES [Health, Economic Assistance, Liability Protection, and Schools] Acts, it might not be very successful in the short term, unless it’s added as a simple amendment to any larger relief deal that’s finalized. ”

Some argued for extending support to CMBS borrowers under the PPP and Main Street Lending Program, as recommended the Commercial Real Estate Finance Council, a professional group. Likewise, Senator Mike Crapo, R-Ind., Chairman of the Senate Banking Committee, approved the expansion of the Main Street program to address the “unique circumstances facing commercial real estate, including securitized commercial mortgages”.

Barclays analysts, however, said a more viable solution would be to develop a relief program on smaller balance CRE loans. They estimate that up to 30% of loans that would qualify for the proposed preferred equity facility have balances below $ 25 million.

But even those solutions would be a bridge too far, Penner argued.

“Capitalism works when our government can maintain discipline and does not step in to save failures,” Penner wrote. Hiding “systemic weaknesses in the CMBS market by rescuing borrowers with taxpayer capital, as recommended by the current legislative proposal, would surely jeopardize the sustainability of CMBS.”

(Bloomberg News Supplementary Report)