"Tranche Warfare" Halts Recovery in Euro CMBS

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Efforts by out-of-money European investors has thwarted recovery efforts by senior bondholders in troubled CMBS deals, according to a Fitch Ratings report published today.

For a CMBS deal structured without a special servicer, a junior lender will try to use legal means to prevent in-the-money investors from taking certain actions. Such was the case in the Alburn Real Estate Capital transaction, the Fitch report said.

In other cases, accommodating the different need of investors across the ratings spectrum contributed to the notes defaulting at legal final maturity, like in the case of the Uni-Invest deal, Fitch analysts said in the report.  

"The  special servicer has an overarching duty of care to all investors and has to conform to overall servicing standards, so it’s important not to assume that any one investor group can force though changes to the detriment of others," explained Euan Gatfield, a managing director in Fitch's London office.

Gatfield said in the report that this type of "tranche warfare" is likely to continue for inappropriately structured CMBS deals; where thinly capitalized investors are given "vesting control" in the offering despite not having their interests well aligned with senior bondholders.

Huxley Somerville, a managing director in Fitch's New York office, said that U.S. CMBS structures have also dealt with "tranche-warfare", although the impact on deals has not been as great.

Investors at the bottom of the capital stack prefer to work out loans, whereas senior noteholders are looking to liquidate troubled loans as quickly as possible, Somerville explained in the report.  

"The difference in the U.S. is that a lot of these problems have been with conduit loans, so they have occurred on an individual property while a large part of the rest of the pool is still performing relatively well," Somerville said.



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