It’s fascinating to look under the hood of a particular deal and see all the moving parts that make it possible.
At the SourceMedia Buying and Selling Distressed Mortgage Portfolios Forum recently in New York, all of the major participants in a nonperforming mortgage-backed security were on a panel to talk about the unusual deal.
How unusual? It’s the first of its kind in 14 years! A CMBS, it featured 271 nonperforming or subperforming CRE loans made into a $132 million single-tranched security. Face amount of the loans used in the deal is $525 million.
Rialto Capital was the packager. Moody’s Investors Service provided the rating (its lowest investment-grade rating). JPMorgan issued the security and New York Life Investments was the investor.
For one thing, there is no shortage of collateral for securities like these. “There’s billions of this stuff out there,” said panel moderator Steven Schwartz, managing director, loan acquisitions, Torchlight Investors.
But, “it’s a lot of work,” said Jonathan Strain, managing director, JPMorgan. “We embraced it early. We know a lot of things our competitors don’t.”
A second deal has been done, and JPMorgan is working on five more like it. It is “back to the future” for Morgan, which used to make securities out of Resolution Trust Corp. and Federal Deposit Insurance Corp. nonperformers back in the 1990s.
Strain said the MBS will prove to be high-yield, trading in the 8% to 10% yield bracket.
The loans repay very quickly, participants said. Matt Salem, managing director of Rialto Capital, said this made the deal attractive to investors looking to minimize interest rate risk.
Investor New York Life has $33 billion of CRE investments, including $9 billion in CMBS, said Brian A. Furlong, managing director.
Tad Philipp, director of CRE research at Moody’s, noted that the Rialto deal included a lot of land loans.
He said Moody’s information about the loans “was better now than it was then (the 1990s). We had something on every loan,” be it an appraisal or a BPO (broker price opinion).
The five new deals in the pipeline indicate this is a security that might have legs. Perhaps bonds with more than one tranche can be structured in the future, to give investors a wider choice.