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JPMorgan Said to Plan Biggest CMBS Offering of Year

JPMorgan Chase & Co. plans to sell $1 billion of commercial mortgage-backed bonds, giving control of soured loans to a holder of the riskiest portion after another offering ceded power to investors in the safest pieces.

JPMorgan’s sale, the largest this year of the debt, would grant hedge fund H/2 Capital Partners LLC, the buyer of the bottom $50 million slice, primary authority over troubled loans, according to people familiar with the transaction who declined to be identified because negotiations are private. Goldman Sachs Group Inc. and Citigroup Inc. gave those rights to investors of the highest-rated portions in a $788.5 million offering on Aug. 4.

Concern that holders of the riskiest pieces may make decisions favoring their own interests prompted Goldman Sachs to switch from the traditional structure of securities backed by hotels, shopping malls and skyscrapers. Spreading control among numerous senior bondholders may create confusion in the event of defaults, according to NewOak Capital LLC’s Ron D’Vari.

“It’s very difficult to come to terms with delinquent borrowers as it is,” said D’Vari, chief executive officer of the advisory and asset-management firm in New York, and previously the head of structured finance at BlackRock Inc. “If you multilayer that with additional bureaucracy, it becomes more difficult.”

Sales Decline

H/2, the Stamford, Connecticut-based commercial-real estate fixed-income manger, will receive a yield of more than 14 percent on its 10-year investment, assuming the loans take no losses, one of the people said.

That compares with an 8.55 percent average yield for speculative-grade companies, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. High-yield, high- risk, or junk, debt is ranked below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

The higher-ranked portions of the deal are set to be offered next month, the people said.

Justin Perras, a spokesman for JPMorgan, Michael DuVally of Goldman Sachs and Alex Samuelson at Citigroup, all in New York, declined to comment.

Spencer Haber, chief executive officer of H/2 Capital, didn’t respond to a phone call seeking comment.

Sales of commercial mortgage-backed securities plunged 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007, according to data compiled by Bloomberg. Banks arranged $3.4 billion of the securities last year, and about $2.4 billion has been issued in 2010.


Top-ranked securities yield 2.76 percentage points more than Treasuries, compared with 3.95 percentage points at the start of the year, and 4.84 percentage points a year ago, according to a Barclays Plc index.

Late payments on commercial mortgages bundled and sold as bonds are at a record 8.25 percent as of July, compared with 3.04 percent a year earlier, according to Fitch Ratings.

Investors who hold the most-junior slices, or B-pieces, are first to be wiped out as losses mount and may have an incentive to keep the debt outstanding rather than foreclose, potentially punishing other holders.

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