A 2007 commercial mortgage securitization has earned the dubious distinction of becoming the first deals to stop paying interest to the senior most class of bondholders, according to a special report published by Trepp late Friday.
The deal, MSC 2007-HQ13, is one of the 25 CMBS issues that makes up part of the CMBX 5 Credit Default Swap Index.
The shortfall will occur because the deal’s servicer, Wells Fargo, has said it plans to withhold cash flows from the deal to recoup $10.5 million of payments it had advanced on the Pier loan, according to research Barclays published on March 14. The report cites Fitch Ratings and Standard & Poor’s.
“The rating agencies' commentaries indicate the servicer intends to recoup the advances potentially all at once, which would lead to short-term shortfalls even to duper level A1A, A2, and A3 tranches and also the AM and AJ, leading to downgrade watches on the bonds,” Barclays said.
Analysts at the bank noted that the deal is currently generating $3.4 million of interest and principal cash flows each month, and it would take three to four months for the servicer to recoup all of the advances from this cash flow and another three to four months to repay the shortfalls fully, assuming there are no paydowns or liquidations, which would speed recoveries.
That wasn’t the only bad news in the March remittance report, however. In it, the special servicer handling the Pier loan said that the value of the property had fallen substantially since the last time it was appraised, in June 2012.
Previously, that $80.5 million loan was carrying a $62.7 million appraisal reduction – enough to wipe out all bonds up to the A-J class. This month, the appraisal reduction was bumped up to over $80 million – indicating a 100% loss (or more) is possible, according to Trepp.
Why the lower appraisal? Barclays said the special servicer commentary indicates that the property’s condition has deteriorated because of increased competition in gambling from neighboring states, a drop-off in tourism as a result of Hurricane Sandy, low tenant sales volume, and needed structural repairs.
“As such, the property would likely need to liquidate for more than $20 million in gross proceeds to avoid a 100% loss,” Barclays said in its report.
“Based on the latest commentary and the non-recoverable determination, a 100% or greater loss is likely, which would wipe out the mezzanine loans and approximately 25% of the AJ tranche.”
Even before the latest writedown, nine classes of bonds issued by TK … been extinguished by collateral losses, according to Trepp. “That has made the F class – originally rated BBB plus – the first-loss class,” it said.
Trepp noted that the F class’ balance has already been reduced by almost 75%.