Goldman Sachs Pulls Loan From Commercial-Mortgage Bond DealSarah Mulholland
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.
The borrower on the Perkins loans received a so-called discounted payoff, or DPO, on debt on the properties in recent months, meaning the loan was paid off for less than the mortgage balance, according to Morgan Stanley’s Hill. The payoff will mean losses for investors that hold a CMBS deal sold by JPMorgan in 2006 that contained the older loan, Hill said in a report today. Such arrangements are granted to borrowers who are struggling because of vacancies or other problems.
The current appraisal for the Perkins portfolio is $69.5 million, according to Hill, indicating that the value of the real estate is higher than was previously thought.
“This suggests that either the DPO price was too low or the appraisal value was too high,” Hill wrote in the report. “Either way, it’s a bad scenario.”
CMBS Investors are going to have a problem refinancing that loan, said Darrell Wheeler, a bond analyst at Amherst Securities Group LP in New York.
The commercial-mortgage bond market was rattled in July 2011 when Goldman Sachs and Citigroup Inc. were forced to yank a $1.5 billion CMBS transaction after placing it with investors when Standard & Poor’s withdrew its ratings on the deal after finding a discrepancy in its models.
In October, Goldman Sachs mistakenly added about $1.5 million of interest costs to a bond offering from Ford Motor Co., leading the New York-based lender to lower its fee for the automaker’s finance unit.
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.