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 Issue 585 - 6th April

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News

CMBS

CMBS 'haves' and 'have-nots' highlighted

The planned conversion of the Westside Pavilion property in Los Angeles - securitised in WFCM 2012-LC5 - is one recent example of a mall borrower resolving a troubled CMBS loan creatively (see SCI’s CMBS loan events database). Morningstar Credit Ratings highlights the move in new research illustrating that the majority of 2012 vintage mall loans should remain stable, with low term default risk, despite having higher leverage than their 2013 and 2014 counterparts and significant exposure to regional shopping centres.

US$4.05bn of 2012 vintage mall loans were underwritten before mall defaults began rising in 2013, with a weighted-average LTV ratio of 61.7% and debt yield of 10.6%. Over 75% (US$3.2bn) of these loans have posted stable or improving cashflow since underwriting, benefiting from their strong locations and a healthy economy. But four – representing US$263.5m – were transferred to special servicing in 2H17, due to difficulties with retaining tenants. 

The US$140.5m Westside Pavilion loan transferred to special servicing in September 2017, following the relocation of anchor tenants Macy’s and Nordstrom to nearby Westfield Century City and a drop in net cashflow of 8.6% since underwriting. Rather than re-tenanting a significant amount of square-footage, owner Macerich entered into a joint venture with Hudson Pacific that will convert 80% of the property to office space, which is more in demand in the property’s submarket.  

The reconfiguration is expected to be completed by mid-2021 at a projected cost of over US$475m, including the estimated value of the mall. The property is set to have 500,000 square-feet of offices and 100,000 square-feet of retail space.

Morningstar views the reconfiguration as a positive credit event that will likely increase the value of a retail property with declining cashflow. However, as it would be unusual for the servicer to allow the transformation to occur under the current CMBS structure, the loan - which is currently locked out - is likely to be modified and either defeased or paid down with a penalty.

The agency does not forecast a loss for the loan, based on its US$161.9m value, which assumes a three-year lease-up period, a 6.5% capitalisation rate and a 9.5% discount rate. 

The other 2012 mall loans in special servicing are the US$66.37m Fashion Outlets of Las Vegas (COMM 2012-CR4), US$30.94m Salem Center (JPMCC 2012-LC9) in Oregon and US$25.7m Susquehanna Valley Mall (COMM 2012-LC4) in Pennsylvania. In contrast to Westside Pavilion, these properties have seen a respective decline in net cashflow of 24.7%, 23.6% and 39.4%, with Morningstar projecting losses of US$12.88m, US$4.88m and US$12.75m for the assets.

The Morningstar research goes on to highlight six loans with a combined US$588.7m balance – including Eastview Mall and Commons (COMM 2012-CR4 and COMM 2012-CR5) and Dayton Mall (WFRBS 2012-C10) – that have seen their most recent full-year net cashflow decline by over 10% since underwriting, but which don’t have a value deficiency in the agency’s view because of low leverage at issuance and other mitigating factors. It also highlights three loans with stable performance but elevated maturity risk due to high LTVs – Town Center at Cobb (WFRBS 2012-C7 and 2012-C8), Poughkeepsie Galleria (UBSCM 2012-C1) and Newgate Mall (UBSBB 2012-C4).

Finally, the report focuses on three large loans that have exhibited positive metrics that should enable them to successfully pay off – Crossgates Mall (COMM 2012-CR1, CR2 and CR3), Concord Mills (WFRBS 2012-C10) and RiverTown Crossings Mall (COMM 2012-CR1).

The report concludes that changes in the regional mall landscape may ultimately produce a bifurcation into the ‘haves’ and ‘have-nots’. Even as major retailers have announced hundreds of store closures over the past several years, stronger malls are adapting to changes in demographics and shopping habits by offering additional amenities, as well as dining and experiential offerings, and aggressively re-tenanting vacant spaces. Meanwhile, second-tier properties not only have difficulty filling empty spaces, but vacancies can also often trigger a domino effect, with other anchor and in-line tenants vacating and driving performance lower.

CS

4 April 2018 15:10:44

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Market Moves

Structured Finance

Market moves - 6 April

Europe

CSC has hired Robert Berry as chairman of its capital markets group in London and Debra Parsall as director, also in London. Berry was most recently global head of capital markets at Intertrust Group. Parsall was most recently a director of capital markets at SFM Europe.

The Bank of England has hired Antonio Guevara as an ILS specialist. Guevara was previously involved in structuring and origination in the ILS and insurance department at Tullett Prebon.

North America

Palmer Square Capital Management has hired Scott Betz in the newly created position of coo and will also serve as chief compliance officer. He comes from Scout Investments, where he was coo, chief compliance officer and treasurer.

Brian Juliano, md at PGIM Fixed Income, will be named head of US bank loan portfolio management on retirement of Joe Lemanowicz later this year. Juliano will also continue in his role as co-head of the firm’s US CLO business together with Bent Hoyer, and will be a senior portfolio manager for CLO tranches. In his CLO-related capacity, he will continue to report to John Vibert, managing director and head of structured products. Juliano joined the firm in 2000, and became a member of the bank loan team in 2003. Before joining the bank loan team he was a CDO analyst and a member of PGIM Fixed Income’s Financial Management group.

Mark Squitieri has joined B Riley FBR as head of IG credit trading and md of its fixed income capital markets group. He was previously md, credit trading at Tribal Capital Markets.

Acquisitions

Stone Point Capital has acquired a majority stake in American Mortgage Consultants. Terms of the transaction have not been disclosed.

Partnerships

Ranieri Solutions has partnered with Symbiont, a blockchain and smart contract firm. Ranieri Solutions hopes the partnership will bring further efficacy, transparency and security to the mortgage markets.

ZAIS suit filed

A class action suit has been filed in the New Jersey District Court against ZAIS Group Holdings that stems from the proposed transaction, pursuant to which the minority shares of ZAIS class A common stock will be acquired by the company’s majority stockholder, chairman and cio defendant Christian Zugel, through his affiliated entities Z Acquisition and ZGH Merger Sub (SCI 12 January). The defendants filed a preliminary proxy statement with the US SEC in connection with the proposed transaction, which was subsequently amended but omits material information. The action alleges that the omission renders the proxy statement false and misleading and, as such, the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Specifically, the proxy statement is said to omit material information regarding the company’s financial projections and the valuation analysis performed by its financial advisor Houlihan Lokey, which would allow stockholders to better understand the financial analyses performed by the financial advisor in support of its fairness opinion.

ICR SLABS RFC

Moody's is seeking feedback on its proposed approach to rating ABS backed by payments from well-seasoned income-contingent repayment (ICR) student loans in the UK, the key risk of which is uncertainty over the size of borrower payment obligations and the extent to which they will be large enough to pay off the loans prior to cancellation. In particular, Moody's analysis would focus on three major risk factors in ICR loan payments: growth in real income; likelihood of borrower unemployment; and likelihood of loan cancellation. Market participants are invited to comment on the proposals by 3 May 2018.

BDC externalisation

Barings is set to become the investment adviser to Triangle Capital Corp, a BDC that invests in the lower middle market. As part of the transaction, Barings will invest US$100m of equity in the company’s shares to establish a significant ownership stake and make an US$85m payment directly to the company’s shareholders at close. Barings has also committed to make up to US$50m of secondary share purchases at prices up to and including the then-current net asset value during the first two years post-close. Upon closing of the transactions, Benefit Street Partners will purchase the company’s current investment portfolio for US$981.2m and Barings will manage the company going forward. Eric Lloyd, head of global private finance for Barings, will serve as ceo of the BDC.

6 April 2018 15:58:59

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