For Rialto Capital Advisors, discussions with borrowers peaked in May and have flattened out since then, after shelter-in-place orders ended in many parts of the US and retail and hospitality businesses opened up again, says Jay Mantz, president of Rialto Capital Management, for which RCA is its special servicing business.
As of 31 March, RCA was named special servicer on 6,846 CMBS loans totaling $107.2 billion across 122 transactions, according to Fitch Ratings. RCA was also actively working out 186 defaulted CMBS loans totalling $2.8 billion and 31 REO assets with an unpaid principal balance of $446.8 million.
RCA had 81 employees focused on the management of distressed loans and REO assets at the end of Q1 2020 and subsequently hired nine additional staff to handle the increase in borrower requests for debt relief and special servicing loan transfers, according to a Fitch Ratings report.
While Mantz acknowledges there has been a sharp rise in the special servicing rate, he expects most loans in special servicing to ultimately become performing again. RCA’s discussions with borrowers generally have been focused on loan modifications, and he believes most borrowers will have the ability to continue to pay the debt service and support the asset long term because they were conservatively levered going into the crisis.
“First and foremost, the big difference from the GFC to covid is going into the crisis. Borrowers had a lot more equity in the real estate than they did back in 2006, 2007”
Rialto Capital Management
For CMBS, the average loan-to-value ratio for 10-year fixed-rate loans originated from 2017 to 2019 was in the mid-to-high 50 percent range, compared with an average LTV of 70 percent leading up to the global financial crisis, according to Mantz. “I think that, first and foremost, the big difference from the GFC to covid is going into the crisis. Borrowers had a lot more equity in the real estate than they did back in 2006, 2007,” he says.
Additionally, under credit risk retention rules that went into effect in late 2016, the weighted average debt coverage ratios for CMBS loans originated from 2017 to 2019 were 2.25 to 2.5, Mantz points out: “That’s why a lot of these assets will perform – because there’s a lot of coverage from leases in place relative to the debt service.”
For these reasons, Mantz maintains the majority of loan distress will not come from CMBS, since such loans generally have been backed by stabilized income-producing properties. Instead, most of the note sales and liquidations to date have been tied to bridge loans on non-stabilized assets with high vacancies, or loans financing development deals and covered land plays – assets that consequently have less cashflow to keep the debt service current.
“A lot of these loans had capital reserves or interest reserves. But as they burn off, there isn’t enough income from those properties to support the debt service,” he remarks. “That’s the area where there is going to be bigger distress.”