Goldman Sachs Gives More Power to AAA Holders in CMBS
Goldman Sachs Group Inc. is offering to give investors in the highest-rated portions of a bond sale backed by commercial mortgages control in the event the loans go bad as bankers attempt to revive the market.
The $788.5 million offering gives holders of the safest portion of the transaction, or about 81 percent of the deal, the power to direct and replace firms hired to handle loans that become troubled, according to marketing documents distributed last week to investors. Typically, that right is held by investors who buy the smaller, riskiest slice.
It’s “plowing new ground,” said Patrick Sargent, a partner at Dallas law firm Andrews & Kurth LLP.
Goldman Sachs is attempting to address concern that holders of the riskiest pieces of commercial mortgage bonds in the $700 billion market may make decisions that favor their interest over other investors in the transactions when loans sour. Late payments on office buildings, shopping centers and other properties jumped to a record 7.71 percent as of June 30, from 2.67 percent a year earlier, according to Moody’s Investors Service.
“This is a big nod to the AAA buyers,” Lisa Pendergast, a strategist at Jefferies & Co. in Stamford, Connecticut, said in an interview.
A unit of New York-based hedge-fund firm Elliott Management Corp. bought the slice most likely to take losses in the latest mortgage-bond offering by Goldman Sachs, according to the marketing documents. Scott Tagliarino, a spokesman for Elliott, and Michael DuVally, a spokesman for Goldman Sachs, declined to comment.
‘B-Piece’ Buyers
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, punishing other holders.
“Some investors don’t like the link between the B-piece buyer and the special servicer,” Sargent, a member of the executive committee of the Commercial Real Estate Finance Council, a New York-based trade group, said in a telephone interview. “It was one of the points raised” by investors in discussions about how to restart issuance, he said.
Units of special servicers, which are firms that handle troubled loans, often were buyers of the riskiest portions of commercial-mortgage bonds, Sargent said.
Top-rated commercial mortgage-backed securities yield 2.73 percentage points more than Treasuries, compared with 3.95 percentage points more than the benchmark at the beginning of the year, according to a Barclays Plc index. A year ago, the debt was yielding a spread of 5 percentage points.
‘Innovative Structure’
The offering being marketed by Goldman Sachs and Citigroup Inc., the fourth sale backed by newly originated commercial mortgages this year, uses an “innovative structure,” according to Andy Solomon, a managing director at Angelo Gordon & Co. with $23 billion in assets under management. It still doesn’t eliminate potential conflicts of interest, he said in an interview.
“I don’t see any reason to believe that AAA holders would influence special servicers to make better decisions for all bondholders as a group,” said Solomon, who is based in New York and oversees $4 billion in commercial-mortgage-backed bonds. “These are the same folks that wanted to liquidate loans at fire sale prices into a no-bid market two years ago.”
Holders of the top-ranked debt get paid first if the loan is liquidated, meaning it may be to their advantage to foreclose sooner rather than later, even if property prices are at a bottom. U.S. commercial property prices, down 39 percent from 2007 peaks, rose for the second straight month in May, according to Moody’s.
Higher Yielding
Some investors may shy away from buying the lowest-ranked portion of a commercial-mortgage backed bond deal if they can’t exert control over soured loans, though the chase for higher- yielding assets may make it an easier sell, Sargent said.
“This is an environment where there are more investors for that riskier slice,” he said.
An affiliate of BlackRock Inc., the world’s biggest asset manager, bought the non-investment grade portion of a $716.3 million commercial-mortgage bond offering sold by JPMorgan Chase & Co. on June 11, according to deal documents disseminated to investors at the time of the sale.
The BlackRock affiliate retained “certain control rights,” including directing the special servicer, the documents show. Lauren Trengrove, a spokeswoman for BlackRock, declined to comment, as did Brian Marchiony, a JPMorgan spokesman.
The Goldman Sachs offering comes as banks are trying to revive the market after sales tumbled 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 $1.7 billion has been issued in 2010. The lack of sales chokes off funding to borrowers with maturing debt.
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net