A settlement to convert commercial mortgage-backed security (CMBS) loans affiliated with bankrupt General Growth Properties (GGP) back to performing status, if reached, assuages market concern that the sector would be susceptible to increased losses, according to Fitch Ratings.
Settlement terms have been reached between a group of special servicers and GGP for 73 CMBS loans securitized in various CMBS transactions and included in the April 2009 Chapter 11 filing of GGP. If confirmed by the bankruptcy court, $9.7 billion of loans secured by 92 properties would emerge from bankruptcy within the next 60 days and would return to performing loan status 60 to 90 days thereafter.
There was concern within the structured finance community that the inclusion of CMBS assets in GGP's bankruptcy would leave the bonds vulnerable to negative rating movements due to their exposure to actions of the parent company. The inclusion of the CMBS assets with the bankruptcy filing of the parent reminded market participants that these assets are bankruptcy remote and not bankruptcy proof, according to Fitch Senior Director Adam Fox.
‘The successful resolution substantially alleviates the risk of rating downgrades for the transactions and illustrates the effectives of bankruptcy remoteness structures,’ Fox says. ‘Removing the loans from bankruptcy with their mortgages intact is an important test of the Special Purpose Entity structure, which is a key component in structured finance.’
As such, Fitch does not expect the modification of the loans and their subsequent return to master servicing to have rating implications. Fitch did not take significant negative rating actions when GGP filed bankruptcy due to the strong performance and moderate leverage of the underlying properties believing that a modification of the loans would have been the likely outcome. Fitch expected losses at the time were limited to special servicing fees, which under the terms of the proposed settlement, may be paid by GGP.
The settlement, which includes loans serviced by CWCapital Asset Management, LNR Partners, Capmark Finance, J.E. Robert Companies, Midland Loan Services, Centerline Capital Group, Prudential Mortgage, Pacific Life and ORIX, provides for maturity extensions of three to nine years with fair consideration being given to the CMBS bondholders.
General terms of the settlement include; extension of the loans at their current interest rates, payment by GGP of an extension fee and all trust expenses relating to the workout and bankruptcy, payment of accrued amortization during the bankruptcy, loan amortization going forward with amortization steps from 30 to 20 years depending on the length of the loan, establishment of leasing reserves, and a performance-based lockbox.
SOURCE: Fitch Ratings