This report from today’s TreppWire on the CMBS market shows that for the first time ever a AAA rated tranche has been hit with a nonpayment of interest. You may recall that these big CRE mortgage pools are divided up into many tranches with different levels of risk for investors. Call it slicing and dicing if you will. This represents a turning point in this market as many of their underlying loans have gone through “extend and pretend” until the reality of an overvalued commercial real estate market forced them to realize losses. I have written about this at length and believe that these investment pools were actually well structured and even after the Crash. Most of the senior bond holders were protected from losses. Now losses are being realized and it hits the top of the credit stack. — JH
Trading Alert: 120% Loss Buries ’02 Deal – Half of Deal Wiped Away – No Interest Paid in August to Any Class
With Almost $6.8 Million in Unpaid Servicer Expenses, Bondholders Won’t See Interest for Months
First for CMBS: Conduit Tranche at Top of Credit Stack Sees Interest Shortfall
Back in January, we posted the following headline about JPMCC 2002-CIBC4: “Time to Steer Clear of 2002 Deal – New Appraisal Reduction Data Indicates Six Classes of Bonds at Risk.”
This month the hammer fell on CIBC4. (We were going to use another cliche for the occasion–the dropping of the other shoe–but the sheer violence of the loss made that seem too benign).
In total, the deal suffered a $61.3 million loss in August. This wiped out classes F through K completely. In addition, 71% of the E class was cancelled out. There was no principal and no interest paid on any of the bonds in the CIBC4 deal this month. The excess of the deal expenses over the recovery proceeds wiped out all cash in the deal and will continue to wipe out interest for months to come.
The interest shortfalls also hit the X-1 interest-only class. This bond was originally rated AAA. We believe that this represents the first time a AAA bond at the top of the credit stack has ever been hit with an interest shortfall in the CMBS conduit world. (Plenty of A-M and A-J bonds have had interest shortfalls, but those do not reside at the top of the cash flow waterfall. The CIBC4 deal preceded the creation of A-Ms and A-Js.)
The loss was driven by the $61 million Highland Mall note. The asset made up 53.2% of the total collateral pool for the CIBC4 deal prior to August. As of July, the loan had been carrying an appraisal reduction of $55.8 million, or over 91% of the loan balance. Unfortunately for bondholders, that proved to be an overly optimistic assessment.
The property behind the loan, a 487,000 square foot mall in Austin, TX, netted only $1,026,554 from the sale. The servicer took $811,351.66 to pay additional expenses, but that left $6.8 million still to be repaid. At the current rate, it would be months before any principal or interest flows to bondholders in the deal. When all expenses are paid, the loss severity should be about 120%.
Late last year, the loan had been looking at an appraisal reduction of $15.9 million. However, that was bumped to over $55 million in January, prompting our earlier warning about the deal.
According to recent servicer commentary from earlier this year, Austin Community College (ACC) became the ground lease lessor, having purchased those rights from AIG. The notes go on say that ACC now owns “all three vacant anchor boxes.”