CMBS BONDHOLDERS, GET NERVOUS:
November 13, 2009
On Thursday November 12th, a bankruptcy court judgment in the Extended Stay Hotels case in NY signalled a possible change in how borrowers negotiate with first mortgage CMBS bondholders, and CMBS bondholders should worry.
The bankruptcy judge in the case gave the borrower, Extended Stay Hotels (ESH), the right to access a list of names of bondholders of a CMBS trust with $4.1 billion of mortgages on 680 ESH hotels in order to allow the borrower to negotiate a plan of reorganisation that meets the objectives of the various bondholders (read as in “give me my money now”, or, “don’t wipe me out yet”).
This ruling sets a precedent for possible direct involvement of individual bondholders in various tranches in the restructuring process in other situations where the borrower defaults on a mortgage that is part of a CMBS. This would clearly be in direct conflict with the rules stipulated in the CMBS securitisation documents which vest the Special Servicer with bondholder representation. The potential for chaos in a scenario where all the different tranches were individually represented is enormous and would seem to be contrary to the essential structure of the CMBS.
Charles Cecil
Opin Partners, LLC
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