Goldman Sachs Group Inc. pulled a loan from a commercial-mortgage bond deal sold last week after investors balked at the debt amid concern that underwriting standards are slipping in the $550 billion market.
The $47.5 million loan, linked to 10 shopping malls in Nebraska and South Dakota, was removed because of a “potential dispute” between the borrower and a lender, according to a filing today with the U.S. Securities and Exchange Commission.
The debt, called the Perkins Retail Portfolio, was originated by Jefferies Group Inc., according to deal documents obtained by Bloomberg News. C-III Capital Partners, the servicer overseeing the mortgage, was seeking additional information from the borrower about the properties while the $1.1 billion commercial-mortgage backed securities offering was being marketed, according to a Nov. 5 statement on C-III’s website.
“This is one of the first instances that we are aware of that a loan was pulled out of CMBS deal after pricing,” said Richard Hill, a debt analyst at Morgan Stanley in New York. “That deal priced at a significant concession to another deal priced that same day, so investors were already concerned about the credit quality.”
A top-ranked portion of the transaction maturing in 10 years was sold to yield 108 basis points more than the benchmark swap rate, compared with 96 basis points on similar debt sold by JPMorgan Chase & Co., according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Michael DuVally, a spokesman for Goldman Sachs, and Richard Khaleel of Jefferies declined to comment.
The Perkins loan wasn’t the only mortgage that raised red flags. In a supplement distributed to bond buyers prior to the pricing, the underwriters disclosed additional information about a $3.8 million loan linked to manufactured housing in Virginia, noting that the loan documents were being modified because the borrower failed to disclose a guilty plea in 1989 arising from “incorrect statements” submitted to lenders.
Sales of bonds linked to everything from strip malls to skyscrapers are poised to double to $70 billion this year as investors chase riskier assets with the Federal Reserve suppressing interest rates for almost five years, according to Credit Suisse Group AG.
Moody’s Investors Service is increasing the amount of credit protection required to obtain investment-grade rankings on the debt as loans get risker, the New York-based rating company said in an Oct. 28 report.
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