Anchorage CMBS Clash Exposes Europe Dysfunction: Credit Markets

The battle to control $1 billion of debt to finance about 300 nursing homes in the U.K. shows why the recovery in Europe’s $100 billion commercial mortgage-bond market is stumbling.

A London court will be asked on Monday to decide if U.S. hedge fund Anchorage Capital Group LLC can replace the manager of loans packaged into the securities, stalling a sale of the properties whose operator collapsed in 2011. BlackRock Inc. is among investors opposing the transfer because they stand to be repaid in full if they are sold.

“The financial crisis brought about scenarios for CMBS that were never thought of when the documents were drafted,” said Ed Panek, head of asset-backed securities at Henderson Global Investors Ltd. in London, which oversees $125 billion.

A 40 percent peak-to-trough decline in real estate prices during the crisis left thousands of properties worth less than outstanding debt, encouraging managers of the securities to defer working out bad debts and fueling disputes between investors. Less than 30 percent of loans packaged into European CMBS maturing in January were repaid on time, while 29 percent defaulted, according to Standard & Poor’s.

Anchorage owns part of the riskiest portion of the bonds, which Bank of America Corp. last month said in a report won’t be repaid if the properties are sold in the next two years. The impasse with senior bondholders shows why Europe’s CMBS market has yet to recover from a wave of defaults triggered by a collapse in property values, while a prompt clean-up in the U.S. helped spur $80 billion of issuance last year.

Price Decline

Jonathan Gasthalter, an external spokesman for New York-based Anchorage, declined to comment on the court case. The firm operated the world’s 10th most-profitable hedge fund in 2013, according to data compiled by Bloomberg. BlackRock spokesman Stephen White also wouldn’t comment.

A recovery in the commercial mortgage bond market is seen as essential for European real estate as banks sell assets and cut lending in response to stricter capital rules. There’s a $42 billion net funding gap, the difference between maturing property loans and the amount of financing available in Europe, according to broker DTZ. That compares with zero in the U.S. and $4 billion in the Asia Pacific region.

“The European CMBS market had not yet reached maturity in terms of infrastructure or experience when the crisis hit, whereas the U.S. market was much more mature and was able to rebound quickly,” said Rob Marshall, head of ABS and financials credit research at M&G Investments in London.

Sales Stall

A total of 133 million euros ($185 million) of commercial mortgage bonds have been sold in Europe this year, down from 2.4 billion euros in the same period of 2013, according to JPMorgan Chase & Co. U.S sales of CMBS total $11 billion this year, down from $15 billion in 2013, Barclays Plc data show.

The extra yield investors demand to hold top-rated European CMBS compared with benchmark rates fell to 190 basis points, or 1.9 percentage points, this month, according to JPMorgan. That’s the least since February 2008 and down from 1,000 basis points in 2009.

Many loans that ran into trouble after the financial crisis remain unresolved and the number of loans held by special servicers, which can restructure troubled deals by selling debt and foreclosing on properties, is at a record 18 billion euros, according to Moody’s Investors Service.

Fordgate Default

The loan bundled into the Fordgate Commercial Securitisation No. 1, backed by U.K. properties with tenants including HSBC Holdings Plc, was extended for a 10th time this month, according to data compiled by Bloomberg. The debt defaulted at maturity in October with an outstanding balance of 261.9 million pounds ($437 million), according to Royal Bank of Scotland Group Plc.

Two loans out of 18 included in EuroProp EMC VI SA, originated by Citigroup Inc. in 2007, were extended for the ninth time this month, RBS said. The loans backed by German properties defaulted in July 2010.

The spat between Anchorage and BlackRock is over bonds backed by a single loan originated by Credit Suisse Group AG that was secured by nursing homes throughout the U.K. It was packaged into a deal known as Titan Europe 2007-1 (NHP) Ltd., with notes of varying risk and return sold to investors.

Occupancy Decline

The transaction ran into trouble when occupancy levels declined and there was a slump in the value of the properties. Southern Cross Healthcare Group PLC, the operator that ran most of the homes, collapsed in 2011 amid rising costs.

Capita Asset Services, the London-based special servicer which manages the transaction on behalf of bondholders, asked Deutsche Bank AG to advise on a sales process for the properties with a first round of bids completed in January.

“We continue to give consideration to all options which includes a sale of the borrower group,” said Ian Llewellyn, senior manager of debt solutions at Capita in London. “We’ve not agreed to a sale and ultimately neither the borrower or ourselves are obliged to consider any proposals or offers we receive.”

Money Back

If the property was sold today only investors in the most senior Class A notes would get their money back, according to Bank of America estimates. Anchorage holds the most junior Class E notes.

Anchorage wants to replace Capita with Mount Street LLP, a loan management firm founded last year by former Morgan Stanley bankers. The right to replace the servicer is granted to a controlling class of bondholder, which is typically the party exposed to the first losses on the loan.

“This deal is symptomatic of issues with highly leveraged loans in European CMBS where control rests with a party that is heavily out of the money,” said Malie Conway, head of global credit at Rogge Global Partners.

If the care homes are not sold in the next six to 12 months the most senior notes could begin to suffer losses, Bank of America said in its Feb. 28 report.

“Legacy CMBS structures often create a tension between senior and junior investors,” said Gillian Curran, head of asset-backed securities at Canaccord Genuity Ltd., in Dublin. “The A class want to get paid back in full as quickly as possible, whereas the mezzanine investors might sometimes prefer to delay incurring a loss if the deal runs into trouble, especially if there could be ongoing rental payments that lead to the amortization of the loan and when real estate values have a chance of increasing.”

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