Any CMBS B-Piece Buyers Out There?
Im interested to hear your views on different workout proposals you might have seen, particularly in retail.  How much are you willing to accommodate a Borrower with strong sponsorship when it comes to extensions, deferrals, and the like?
[{"id": "fndqlh4", "text": "Unfortunately, not all B piece holders are created equally. Some prioritize principal recoveries, others just want some portion of their cash back as soon as something transfers to special, and others are willing to go along for the ride with borrowers (modifications, extensions, etc...).\n\nIt will all depend strongly on how your B Piece holder came to own their bonds. They can be holding risk retention pieces, they can be a buyer of risk retention, or they could have bought these pieces years after the deal was securitized. \n\nFor retail, we've usually been willing to allow for maturity extensions on loans that were still covering debt service, but could not be sold or refinanced. That way, we're getting \"extra\" interest that we didn't anticipate, and can brace for principal losses a bit better with that extra interest in our pocket. You'll likely need to pay a fee or put up some equity in to a reserve, but that's not exactly a rule of thumb. It also depends if this is a pre-2008 loan or not. The rules on what a servicer can do got much tighter since then.", "replies": [{"id": "fndsz4b", "text": "Thanks, one more thing.  Can you help me understand your paragraph 2 in the context of your first paragraph, i.e. how does the way the B-piece holder acquires their bonds relate to their priorities?  In general, is a b-piece holder who bought after securitization less likely to go along for the ride?", "replies": [{"id": "fndxk19", "text": "On newer deals, if the original holder of the B-piece is still being held to the 3-year retention requirement, they're going to be extremely sensitive to principal losses. They likely own those bonds at par or are the originator themselves. Conversely, if someone like myself comes in and buys that piece years later, at a discount, a workout that leaves the loan outstanding or only gets us close to par is going to be received more favorably. \n\nI'm sorry that my answers are a bit nebulous. There's honestly no definitive answer on this. It's going to come down to how much faith a servicer (and B Piece holder, to the extend your loan is sizeable) has in their borrower's ability to come out the other side of this thing. They'll either trust the borrower, or they'll trust the asset. If they don't trust either of those things, they're going to be less receptive to a favorable workout.", "replies": [{"id": "fndysw8", "text": "Thank you for the education.  I'm just a dumb borrower.", "replies": [], "depth": 4}, {"id": "fne8ubj", "text": "How can borrowers determine whether the B piece owner of their trust is an originator or a later buyer? \n\nDo you need Trepp or Bloomberg to see this?", "replies": [{"id": "fneardz", "text": "Hmm that's a good question. The B Piece buyer is public info at securitization, so for at least 3 years, the data should be accurate in the deal's respective PSAs - which I usually source from BB, Trepp, or the deal's Trustee site. Once these bonds hit the secondary market, it's 100% opaque. Nearly impossible to track who owns what, without knowing the right players. Guys will get really cagey (myself included) when information like that comes up. It's a bit of an old boy's club (the exception being anyone set up to buy bonds can do it).", "replies": [{"id": "fneby1x", "text": "Yep, one of the more annoying aspects as a Borrower", "replies": [], "depth": 6}], "depth": 5}, {"id": "fneavt6", "text": "As a Borrower, you're typically not privy to the controlling certificate holder; the servicer isn't at liberty to disclose.  However, the prospectus will tell you the initial CCH, but the paper can change hands on the secondary market.\n\nI don't think Trepp or Bloomberg has that info.", "replies": [{"id": "fnf7uvx", "text": "That's what I figured.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "fnek2jj", "text": "You said B-piece buyers bought the bonds at par - can't see how that is possible. It's very typical for the B-piece bonds to pay WAC or a WAC-capped fixed coupon. That generally makes the B-piece pay at similar rates to more senior tranches. The only way to compensate the investor for the additional first-loss risk is by selling the bonds at a discount. And when I see the B-piece pricing, the spread above swaps derived from the yield exceeds the coupon, which means that it has to be at a discount.\n\nSo I can't see how a B-piece would ever price at par, or anywhere near it. I also can't see why the B-piece would definitively price any lower than its price at issuance - it would depend on how actual vs projected performance has changed, no? Can you explain?", "replies": [{"id": "fwhol2n", "text": "You're right. To use round numbers, generally buying the whole b-piece at 40-50 cents on the dollar. Obviously can allocate differently across the BB-/B-/NR (or if you're buying an H, across the BBB-; or if you're buying an H post-covid, add in your BBB flat and sliver of A- hah). But blended you are buying way below par because as you said, they pay WAC and you're taking them down at a yield that is multiples of WAC", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fndv300", "text": "Good points.  CMBS 2.0 offers B Piece holders numerous strategies.  I think with this sharp uptick in transfers to special, you will see most wanting to enter into some type of forbearance to avoid jeopardizing their control via appraisal reductions.", "replies": [{"id": "fndvgn2", "text": "You mean the specials will want to avoid appraisals bc it will jeopardize their control? (edit: isnt the note holder calling the shots)?  Can you briefly elaborate?  Just trying to understand the finer points of b-piece holding", "replies": [{"id": "fndxn3c", "text": "Specials will maintain control.  Special servicing rights do not move as quickly in 2.0 as they did in legacy.  A controlling class holder, the B Piece buyer, can lose control in 2.0 if the new appraised values show their position as out of the money. If I were a B Piece buyer, I would be pushing the Special to forbear and return the loans to master servicing as quickly as possible.", "replies": [{"id": "fnt3qrn", "text": "Doesn't the indenture require appraisals after a certain number of days without payment?  I thought 90 days, and you need to get appraisal.  Then ASER.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fneg9qi", "text": "man, so many of the b tranch owners are predatory...", "replies": [{"id": "fnegq9c", "text": "Very true; this i know first hand", "replies": [], "depth": 2}, {"id": "fnfxksj", "text": "Not really, it\u2019s just business. If your loan goes bad and your equity gets wiped that\u2019s not my problem, I\u2019m in it to maximize my proceeds. The faster I get a judgement against your collateral the faster I can stop the interest above me through a pay down and improve the remnants of my pool by cleaning out the garbage. If you can figure out a way to restructure and make me whole great, if not I want the property. It isn\u2019t my fault the sponsors equity got wiped, lenders aren\u2019t in it for equity like risks with debt like returns.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fnel0lk", "text": "Huge agency b piece buyer, haven\u2019t had anything go to special yet it\u2019s all with the master. When we have control will hammer people - rule (1) of B piece buying is buy it at the fundamental value that you\u2019d own it at", "replies": [{"id": "fneq06h", "text": "Hammer them as in force them to paydown the loan or else youll foreclose?  Particularly in retail, the sponsor matters.  If you have a borrower with excellent sponsorship are you more willing to go along for the ride as in extend the maturity, implement hard lockbox or even A/B note structures?  What does a b-buyer have to look forward to by taking over a retail asset besides cashing out as quickly as possible?", "replies": [{"id": "fnf8jlp", "text": "Exercise FMV, foreclose, fix asset, sell fast. Anyone in the B note game can bring in a fee manager to take direction from a solid asset manager at a PE firm or Hedge Fund buying b strips. At this point if you\u2019re buying a B strip you\u2019re pricing loss adjusted to the FMV value of the watch list notes (or really anything sketchy in the pool) anything on the equity conversion is gravy.\n\nEdit - caveat is DPO me at a price better than what I think it\u2019s worth.", "replies": [], "depth": 3}, {"id": "fnt4htd", "text": "Agency are all multi.  No retail, no office.  Very different asset.  Also, assuming that your fundamental view of the price you bought the piece at even 3 months ago is completely irrelevant.  you have 30% of the the renters not paying, and the fundamental value is negative.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fnexi6j", "text": "Is there a good resource You reccomend to learn more about this aspect of the business?", "replies": [{"id": "fnf8q7g", "text": "Naw, just experience. Don\u2019t know if there are any good books to teach you how to do opportunistic credit buying, it\u2019s a little bit of science, little bit of art, lot of just general experience having seen a ton of deal flow.", "replies": [{"id": "fnfbrsh", "text": "I can dig, I am working on the debt side but there arent many primers or anything out there. When I did corporate finance there was a primer for everything you could think of. Now I am finding I have to make them all myself. Am learning a ton about the secondary market for commercial mortgages these days tho", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]