CMBS Borrowers Seek `Face-Lifts' to Deal Terms After the Fact

  • Uptick in bonds being sold, then quickly altered, Fitch says
  • Investors are kept in the dark on material loan changes

More commercial mortgage borrowers are seeking changes to their loan terms, some adding leverage, shortly after the debt is sold to investors, Fitch Ratings said.

In at least 15 instances this year, borrowers tried to change deal terms on commercial mortgages securitized by Wall Street’s biggest banks, Fitch analyst Mary MacNeill said in an interview. This raises concern that some borrowers and underwriters had planned riskier terms all along, she said.

“Was it contemplated before issuance? That is what we are concerned about, that it was planned,” MacNeill said.

Fitch calls the tactic a “post-pricing face-lift.” Very few loans are altered so soon after securitization, she said.

The biggest borrower in a Citigroup Inc. commercial mortgage securitization, CGCMT 2013-GC17, recently sought a new $18 million preferred-equity position, according to a notice sent to Fitch from the debt servicer. The initial $92 million loan, on Ernst and Young Tower in Cleveland, was the largest in that CMBS issue. Other loans in the same deal went on watchlist this year.

Fitch warned that the new issuance may hinder refinancing, but won’t affect the current rating, according to a Nov. 20 statement by analyst Karen Trebach and MacNeill, chairperson of the rating committee.

Citigroup spokesman Scott Helfman declined to comment.

Deteriorating underwriting and ratings assignment practices on U.S. commercial mortgage-backed securities have come under heightened scrutiny from investors and regulators as the market absorbs more than $82 billion of private-label CMBS this year.

“It’s more than a little concerning that there appear to be an increasing number of material loan change requests, ” said Chris Sullivan, chief investment officer of United Nations Federal Credit Union. Most are “unbeknownst to investors,” he said.

Deal documents don’t require investor disclosure provided the loan servicer agrees, MacNeill said. Fitch warned borrowers and lenders that it “will not hesitate” to cut ratings if the debt becomes too risky.

Some investors are pushing back against riskier underwriting by refusing to buy newly issued securities. That’s forcing banks to revise pricing.

Two months ago, investors rejected an offering from Deutsche Bank AG and Cantor Fitzgerald & Co. amid concern about the quality of one of the loans, according to an October market report from investment firm Amundi Smith Breeden LLC.

“There really is no impetus to make it stop until investors say: ‘No mas,’” Amundi portfolio manager Rob Aufdenspring said in the report. Oksana Poltavets, a spokeswoman for Deutsche Bank, declined to comment, as did Cantor spokeswoman Sheryl Lee.

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