CMBS Servicers Prep for Hotel-Loan Defaults
Commercial MBS servicers are girding for a slew of missed payments on securitized loans backed by U.S. hotels, which have seen cashflows plummet or disappear this month.
Amid increasing restrictions on travel and public gatherings to limit the spread of coronavirus, some hotels have shuttered while others are nearly vacant. That means large numbers of owners won’t be able to make loan payments for the next month or two — and possibly longer.
A wave of borrowers, their attorneys and other representatives have reached out to CMBS servicers in recent days to request loan-payment forbearance, permission to tap reserves and other forms of relief. Several servicing companies said they’re willing to consider those requests, but only on a case-by-case basis.
At Grapevine, Texas, advisory shop 1st Service Solutions, chief executive Ann Hambly said the firm was preparing notices of imminent default for about 50 hotel owners who won’t be able to make their next payments on hundreds of CMBS loans totaling at least $1.5 billion. “We have more coming in every day,” she said.
One servicing veteran said “the more-sophisticated corporate owners are especially out in front” in contacting lenders pre-emptively, before falling into delinquency.
While hotels are the hardest-hit property type at this stage of the crisis, servicing pros said some owners of retail and other properties affected by “social distancing” and the pandemic’s effects on the economy have started to raise similar alarms.
Market pros welcomed initial signals from servicers that they’re willing to be flexible.
“That’s an inherent positive for the sector, that at least initially, servicers will step up and not liquidate right away,” said Senay Dawit, a senior director on the CMBS team at S&P. “When you do liquidate, losses can be much worse than if you can hold onto the assets and let markets calm down.”
Some senior servicing pros said they’ve also received calls from securitization lenders urging them to avoid actions that could cause long-term damage to the CMBS market.
“The CMBS issuers are being proactive,” one servicer said. “They’re not talking to us about specific loans, but they want to know what our plans are for dealing with this.” The lenders are imploring servicers to refrain from pursuing immediate foreclosures and loan workouts, which can be costly and painful for borrowers and bondholders.
“The issuers are telling us, ‘This is not the time for you to go kicking in the borrowers’ teeth,’ ” the servicing executive said. “The issuers don’t really have a dog in this fight,” but they want to ensure that this unprecedented market disruption doesn’t become so painful for property owners that they swear off CMBS borrowing forever, he said. Major institutional borrowers like Blackstone and Brookfield also have a vested interest in preserving CMBS as a financing option, he added.
Hambly at 1st Service said she would like to see sweeping forbearance of loan payments on all CMBS loans backed by hotels and other property types that have seen their cashflows wither due to the coronavirus crisis. But she and others think that would probably require a federal directive of some kind, since CMBS servicers and investors are unlikely to agree on such a drastic move. “If they go loan by loan, I don’t know how they’re going to handle all of it on a timely basis,” Hambly added. “It’s really some sort of holistic solution that’s needed.”
Short of that, master servicers could quickly transfer specific mortgages to their special servicers, who would have the power to modify loan terms. Special servicers typically don’t get involved until a borrower misses two consecutive payments, informs the master servicer that it won’t be able to pay off the loan at maturity, or suffers a significant credit event such as the loss of a major tenant.
Master servicers are responsible for advancing missed payments to bondholders, as long as they are deemed recoverable. Depending on how the loan documents are written, master servicers sometimes have the power to grant forbearances or allow a borrower to pay expenses by tapping unused escrow accounts — such as the reserves that hotel owners set aside to replace furniture, fixtures and equipment as needed. Otherwise, that responsibility typically falls to the special servicer, whose approval might be required in any case.
Given the large-scale disruption, one senior executive at a master-servicing shop said he expects such actions will be thoroughly coordinated between master and special servicers. “We’re already having conversations with the special servicers that are going to make the process less choppy than it was in 2008, 2009 and 2010 . . . when we were building the road before even trying to drive on it,” he said. “We’re better equipped now to do the initial triage than we were back then.”
In the wake of the 2008 crash, special servicers were often accused of manipulating and dragging out loan workouts to generate more fees for themselves. While some borrowers are concerned that might happen again in some cases, B-piece buyers in control of the special servicers generally seem willing to be flexible.
“The majority of the parties involved are all working together this time,” said one servicing executive. “We’re back to doing loan workouts, but the playbook we have today is so much better than it was in 2009.”
Another servicing pro added: “All of the controlling-class holders are very supportive of short-term forbearances, insofar as [borrowers] document the circumstances.”
Forbearances are common in situations where a property’s cashflow is reduced or eliminated by a temporary event that’s outside the borrower’s control, such as highway work that blocks access to a building for a while. But they typically aren’t granted in situations that have longer-term consequences, such as when a property loses tenants or visitors because it is bypassed by a new highway.